STATE OF CALIFORNIA
DEPARTMENT OF INSURANCE
Legal Division, Enforcement Bureau – San Francisco
45 Fremont Street, 21st Floor
San Francisco, CA 94105
November 12, 2014
Elise Klein, Esq.
Lewis Brisbois Bisgaard & Smith
221 North Figueroa Street, Suite 1200
Los Angeles, CA 90012
SUBJECT: Your October 8, 2014
Thank you for your October 8, 2014 letter to Tony Cignarale. You state, in the Introduction, that the FAIR Plan (FAIR) does not seek to change the way it pays total and partial losses, but, instead, seeks to clarify the definition of “total loss.” However, in coming up with its own definition of “constructive” loss, FAIR does intentionally change the way it pays total and partial losses.
The Department understands the financial reasons why FAIR Plan wishes to reword its loss settlement provision to support its payment of a partial loss as a total loss in cases where it would cost FAIR more to have the damaged portion of a dwelling repaired than to pay the fair market value of the entire dwelling. However, California Insurance Code (CIC) Section 205l(b) specifies that, in the case of a partial loss to the structure, the measure of recovery is the amount it would cost the insured to repair, rebuild or replace th???? structure minus depreciation. In other words, a partial loss is not a “constructive” total loss.
Although FAIR wishes to utilize the concept of “constructive” total loss in cases where it would cost FAIR less to pay the fair market value of homes in depressed areas than to pay to repair damage to those homes, CIC Section 205l(b) does not contemplate “constructive” total loss. Rather, in the case of total loss to the structure, FAIR must pay policy limits or fair market value, whichever is less. In the case of partial loss to the structure, FAIR must pay the amount it would cost the insured to repair, rebuild, or replace the damaged area, less depreciation, up to the.policy limit.
In your letter, you refer to Williams v. Hartford Ins. Co., 54 Cal.442, 450-51, to support the contention that a “total loss” does not mean that the property has to be utterly destroyed. Rather, the determination is whether, after the fire, the thing insured still exists as a building, whether the building still has its identity and specific character. The Department agrees with the premise that a building must no longer exist as a building in order for the building to be declared a total loss.
However, by its policy language and proposed disclosure, FAIR is seeking to change this physical standard to an economic one. In the Garnes case that we have been discussing, where a fire damaged Ms. Garnes’ kitchen and a portion of the back of the residence, I see no reason (other than financial reasons on the part of FAIR) why Ms. Garnes’ loss was not treated as a partial loss as, after the fire, her insured home still existed as a building and maintained its unique identity and character.
Therefore, pursuant to CIC Section 10106, the Department is not approving FAIR’s request to modify its CIC Section 10102 disclosure statement. Futiher, as noted above, it is the Depruiment’s position that ru1y policy language which results in a patiial loss being defined as a total loss and measured as fair market value is contrary to CIC Section 205l(b) and must be amended.
Risa Salat-Kolm Attorney III