Tennessee is a valued policy state, which means that in most instances an insurance company must pay policy limits in the event of a “total loss.”  Back in 2009, Parks and I offered some differing viewpoints about what a total loss is or should be (see here and here).  One of the issues we discussed way back then was whether a mandatory demolition of a structure after a fire loss should trigger the valued policy law.  After a jury trial and an appeal to the Sixth Circuit Court of Appeals, Tennesseans got an answer to that question.

In Cincinnati Ins. Co. v. Banks, the City of Manchester issued a mandatory demolition order after a fire loss to the policyholders’ residence.  In summary, the City of Manchester required that the home be demolished, but absent the demolition the home may not have been considered a “total loss” because much of the structure was still standing and may not have lost its character and identity as a home.  The insurer argued that it did not owe policy limits for just that reason – that absent the demolition order the property still looked like a house and therefore should not be considered a total loss.  On the other hand, my clients argued and successfully convinced the trial court that a municipal demolition order creates a constructive total loss.  After considering the issue, the Sixth Circuit affirmed the trial court’s ruling that the home should be considered a total loss, but for a different reason:

The constructive loss doctrine and the identity-and-character test are not mutually exclusive, and can lead to the same result.  The demolition order was valid, and therefore the dwelling would not maintain its identity and character after being razed. Thus the property is an actual total loss, not a constructive total loss.

Translation:  If your Tennessee home or business is damaged and then your local municipality or county enforces its codes and requires that the structure be demolished, that triggers the application of Tennessee’s valued policy law, therefore requiring your insurer to pay the full policy limits.  This is a big, big deal – – particularly in cities (such as Memphis) that have codes authorizing demolition in the event the repair costs exceed 50% of the property’s value.