Should a Deductible Be Subtracted in the Case of a Total Loss?
Consider this scenario - - Jane Doe insures her home for $100,000, with a $1,000 deductible. Unfortunately, Jane's house burns to the ground and is undeniably a "total loss" within the meaning of Tennessee's valued policy statute (click here for a prior post on when a loss should be considered a "total loss"). After months of investigation, the insurance company decides to pay the claim "in full" and sends a check to Jane for $99,000 (policy limits minus the deductible). Was Jane inappropriately shorted $1,000. In my opinion, yes.
Under Tennessee's valued policy statute (T.C.A. 56-7-803), an insurer is liable to the policyholder for the full policy limits if a total loss occurs. In my view, this statute effectively prohibits an insurance company from subtracting the deductible in total loss cases. My research reveals only one case addressing this precise issue, and that is Thurston Nat'l. Ins. Co. v. Dowling, 535 S.W.2d 63 (Ark. 1976). In Thurston, the Arkansas Supreme Court held that an insurance company may not enforce a deductible provision in the case of a total loss when it results in the insured receiving less than policy limits in violation of Arkansas' valued policy law. There is no logical reason why the same rule of law would not be true in Tennessee as well.
Recent Developments - Adams v. Tennessee Farmers Mutual Insurance Company
Earlier this week, the Tennessee Court of Appeals issued a 24 page opinion addressing a variety of issues affecting insureds in the State of Tennessee. The case is Adams v. Tennessee Farmers Mutual Insurance Company, a copy of which is available here. My partner, Clint Scott, and I represented the insured in this case, which was tried way back in December 2008 before Judge Roy Morgan in Chester County. The case was defended by Charlie Trotter, a very talented and experienced defense lawyer who certainly keeps us on our toes. The Court of Appeals opinion is worthy of several blog posts, but I’ll try to summarize the major points here.
First, the Court of Appeals made it crystal clear that legal title is not required in order to have an insurable interest in real property. Tennessee Farmers argued that an insured’s transfer of legal title to a family member mandated a finding that there was no insurable interest. The Court of Appeals disagreed, finding that any interest in property, even the mere right to use property, is enough for a finding that there is an insurable interest. All that is required is that the insured benefit from the property’s continued existence or suffer a loss as a result of its destruction.
Second, the Court of Appeals rejected the proposition that an insured has a duty to notify an insurer of a change in ownership of the insured property when the change in ownership occurs after the policy is issued. This contention actually raised an even broader issue of first impression in Tennessee, i.e., whether an insured has a duty to supplement the disclosures made on an application for insurance after a policy has been issued. After surveying several jurisdictions across the country, the Court of Appeals concluded that there is no such duty, reasoning “the burden is more appropriately placed on the insurer to specify when the insured will be required to notify it of changes in circumstances after the policy is delivered.” Because the policy at issue in this case had no such provision, there was no duty to disclose the change in legal ownership subsequent to the issuance of the policy.
Finally, the Adams case also addressed the issue of whether an insured is entitled to the full policy proceeds when he or she was occupying the property but lacked legal title. In considering this issue, the Court of Appeals again referenced decisions from our sister states and adopted the reasoning of the Oklahoma Supreme Court in concluding that “the insurable interest requirement should not be extended beyond the reasons for its existence by an overly technical construction that frustrates the legitimate expectations of the insured or that permits an insurer to avoid the very risk it intended to insure.”
The Adams case is an important case for first party insurance practitioners on both sides of the bar, and all such lawyers would be wise to read it closely.
"Total Loss" Doesn't Necessarily Mean "Burned to the Ground"
Tennessee's valued policy law(T.C.A. 56-7-803) provides that an insurer is liable to the policyholder for the full policy limits if a total loss occurs. As a result, the big "fight" is often over the issue of whether a loss is "total" or "partial" in nature. Back in May, Parks Chastain commented here that the identity test should be used to determine whether a structure will be deemed a total loss. Parks relied on the Laurenzi and Hollingsworth cases to support his contention that the test is whether a building has lost its identity and specific character as a building. I think our courts interpret the valued policy law in a less restrictive manner than Parks suggests is appropriate.
First, let me point out that the Tennessee Supreme Court, with its present composition, would almost certainly adopt the prudent man test if given the opportunity. Such a test would be an alternative to the identity test referenced by the Laurenzi decision. Under the prudent man test, a house could be considered a total loss if a prudent man would not repair the property because the repair costs would be close to or exceed the replacement cost of the structure. Such a test has been widely accepted across the nation.
Second, and more importantly for a present analysis, the Tennessee Court of Appeals has made clear that Tennessee law does not require that a house is necessarily only a partial loss simply because it can still be identified as to its type of structure. King v. Dunlap, 945 S.W.2d 736 (Tenn. Ct .App. 1996). On the contrary, both the King and Laurenzi cases make clear that a building can still be deemed a total loss even when walls are still standing, the foundation is unimpaired, and some parts of the structure are unconsumed. There is no requirement that there be an absolute extinction, or that all materials be physically destroyed. For example, in Mann v. Grange Mut. Cas. Co., 1986 WL 14223 (Tenn. Ct. App. 1986), the Tennessee Court of Appeals affirmed the trial court's holding that a building was a total loss even when the second level of the house, including the roof and walls, were not completely destroyed.
The lesson? Just because the brick is still standing doesn't mean your loss isn't total in nature. Don't get confused by the "total loss" language. At its base level, it really all boils down to whether it would be reasonable to repair a house or not. Even though that's not technically the legal test, its going to result in the same conclusion most of the time. So if an insurance company attempts to argue that a house isn't a total loss even though it is agreeing the home needs to be demolished and rebuilt, don't go for it. You've got a total loss, and you are entitled to the full face value of your insurance policy.
The Valued Policy Statute Should Not Be Limited to Losses Caused by Fire
Parks Chastain recently authored a post here in which he opined that Tennessee's valued policy statute should apply only to losses caused by fire, not wind. I disagree.
Tennessee's valued policy statutes (T.C.A. 56-7-801 through 803) were enacted in 1927, and last edited just a few years later. Read together, these statutory provisions, known as the "valued policy statute," require an insurer to inspect the insured premises within 90 days of issuing a "fire insurance policy," and if it fails to do so and "a loss occurs," then the face value of the policy is "conclusively presumed to be reasonable." Therefore, the plain language of the statute doesn't limit its application only to fire losses, but rather is phrased broadly to apply to all losses (that are total in nature).
Recognizing Parks' focus on the language of the statutes that seem to limit their application only to "fire insurance policies," it is worth noting that there are "fire insurance policies" that insure against loss caused by risks other than fire. See Ballard v. Farmers Mut. Fire Ins. Co., 1991 Tenn. App. LEXIS 799 (Tenn. Ct. App. 1991) (noting that a policy was called a "fire insurance policy" even though it insured against loss caused by fire, lightning or tornado). Further, true "fire" policies no longer exist, or at least are exceedingly rare if they do. In today's insurance world, fire is one of many risks that has been incorporated into the modern commercial property and standard homeowner policies.
Additionally, the valued policy statute is declared to be a remedial statute, and therefore must be liberally construed. The clear purpose of the valued policy statute is to protect insureds from unscrupulous insurers which might otherwise over-insure property for the purpose of obtaining higher premiums, and then minimize or deny a claim after a total loss by taking the position that the property's value is much less than the face value of the policy. This purpose has been recognized over and over by Tennessee appellate courts, and there is obviously no reason to differentiate between the cause of the loss (fire v. wind) when interpreting the statute to effectuate that purpose.
Finally, there is authority from our sister states which support my conclusion. For example, see Caruso v. Allstate Ins. Co., 2007 WL 625830 (E.D. La. 2007) (interpreting Louisiana's valued policy statute (which is similar to Tennessee's) to apply to wind losses).
