IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT, DIVISION TWO

FAIR PLAN OF CALIFORNIA, Plaintiff/Cross-Defendant/Respondent, v. MARLENE GARNES, Defendant/Cross-Complainant/Appellant.

Contra Costa County Superior Court, Case No. C1102417
The Honorable Steven Austin, Judge

APPLICATION OF THE CALIFORNIA INSURANCE COMMISSIONER FOR LEAVE TO FILE AMICUS CURIAE BRIEF IN SUPPORT OF APPELLANT MARLENE GARNES

Pursuant to rule 8.200(c)(1) of the California Rules of Court, Dave Jones, Insurance Commissioner of the State of California (Commissioner) respectfully requests permission to file the attached brief as amicus curiae in support of Appellant Marlene Garnes on the issue of whether the loss settlement provisions in her FAIR Plan actual cash value (ACV) homeowner’s policy conflict with the measure of indemnity for actual cash value fire policies required by Insurance Code section 2051.

The Commissioner has a vital interest in ensuring the proper interpretation and enforcement of the provisions in the Insurance Code. Moreover, he has an important role in overseeing aspects of the Basic Property Insurance Inspection and Placement Plan (ch. 9 (commencing with section 10090) of Part 1 of Division 2 of the Insurance Code) that provides for the creation of the California FAIR Plan. FAIR Plan is a last-resort association of insurers licensed to write and engaged in writing basic property insurance to help people get basic property insurance when it cannot be obtained through the normal insurance market.

The Commissioner’s amicus brief explains his view of the law’s requirements for the proper measure of actual cash value recovery in an open ACV policy. His brief clarifies that the loss settlement provisions in Garnes’ FAIR Plan ACV policy conflict with section 2051 and thus are invalid and unenforceable. As the Commissioner explains, FAIR Plan’s ACV policy does not afford homeowners basic property insurance coverage that is substantially equivalent to the Standard Form Fire Insurance Policy as required by law, thus undermining the very purpose for FAIR Plan’s creation.

The Commissioner is strongly committed to ensuring the accurate interpretation and application of the Insurance Code, and to providing protection to the California insureds he is meant to protect. Because the Commissioner’s knowledge of the relevant statutes and their legislative history and his expertise regarding the insurance market and the FAIR Plan will assist the Court , he asks permission to file this amicus curiae brief in support of appellant Garnes.

Dated: August 19, 2015
Respectfully submitted,

KAMALA D. HARRIS
Attorney General of California

KATHLEEN A. KENEALY
Chief Assistant Attorney General

PAUL D. GIFFORD
Senior Assistant Attorney General

JOYCE E. HEE
Supervising Deputy Attorney General

Attorneys for Amicus Curiae
Dave Jones, Insurance Commissioner
of the State of California

BRIEF OF AMICUS CURIAE CALIFORNIA INSURANCE COMMISSIONER

Dave Jones, Insurance Commissioner of the State of California (Commissioner) respectfully submits his brief as amicus curiae in support of appellant Marlene Garnes (Garnes).
The Commissioner is the head of the California Department of Insurance (the Department), which is charged with the enforcement of the Insurance Code and other laws regulating the business of insurance in this state. (Ins. Code, § 12906.) That regulatory jurisdiction extends to all insurance companies doing business in California and to those companies’ acts and practices in the handling of claims. (§§ 790 et seq., 12921.)

The Commissioner is vested with the authority to require insurers to fully comply with the provisions of the Insurance Code, and to enforce the execution of the Code and other laws regulating the business of insurance. (§ 12921.) The Commissioner’s office has regulated the business of insurance, including interpreting and implementing insurance related laws, since the Department of Insurance was founded in 1866. Based on historical knowledge, as well as the cumulative experience of the office, the Commissioner is uniquely positioned to assist the Court in interpreting the insurance laws.
The Commissioner also is committed to ensuring the widespread availability of insurance protection to consumers in California. The Department is mandated to protect the public in the regulation of insurance and to ensure a fair marketplace for both insurance consumers and insurers. (§ 790, et seq.) The Commissioner submits that his knowledge and unique perspective can help the Court accurately and consistently interpret insurance statutes to effectuate the Legislature’s intent and to protect the economically disadvantaged homeowners whose only insurance option is FAIR Plan, a legislatively-created insurer of last resort.

For these reasons, the Commissioner seeks to clarify the meaning of section 2051 and to explain how it and other related statutes should be harmonized. The Commissioner submits that the trial court erred in granting summary judgment in favor of FAIR Plan. The loss settlement provisions in FAIR Plan’s open, actual cash value homeowner’s policy directly conflict with section 2051, and therefore are invalid and unenforceable.

INTRODUCTION

Appellant Marlene Garnes bought a homeowner’s insurance policy from respondent FAIR Plan, often an insurer of last resort for homeowners in disadvantaged communities who are otherwise unable to obtain insurance. Garnes’ policy was an actual cash value policy that she believed would pay for losses up to the policy limit of $425,000. Garnes’ home was damaged by a fire that caused about $363,000 in damage to her home, but did not make the home uninhabitable or incapable of repair. The parties agree that Garnes’ home suffered partial damage. Yet, FAIR Plan contends that its policy only requires payment of $75,000, the fair market value of Garnes’ home at the time of the fire and an amount far too small to allow Garnes to pay for the needed repairs to her home.
FAIR Plan mistakenly argues that Garnes’ home suffered a total loss simply because the stipulated cost of repairs exceeds the home’s fair market value. In other words, FAIR Plan contends that a total loss is determined merely by comparison of dollar amounts – the cost of repairs versus fair market value. But the plain language of applicable statutes, which define “total loss to the structure” and “partial loss to the structure,” makes a total versus partial loss determination dependent upon the extent of damage to the structure – the insured house. That interpretation also accords with common sense.

Under the Insurance Code, when a home suffers a “partial loss to the structure,” an actual cash value policy is required to pay the lesser of the cost of repairs (minus reasonable deduction for depreciation) or the policy limit. Because Garnes’ home suffered only a partial loss to its structure, her insurance policy should pay for the cost of repairs under the partial loss payment provision. The superior court erred in ruling that FAIR Plan should only pay Garnes the fair market value of her home, an amount insufficient to accomplish the needed repairs.

ARGUMENT

Insurance regulation is designed to protect the public and policyholders. “The business of insurance is ‘“clothed with a public interest,” and therefore subject “to be controlled by the public for the common good.’” [Citation omitted.]” (20th Century Ins. Co. v. Superior Court (2001) 90 Cal.App.4th 1247, 1265.) The insurer-insured relationship is “often characterized by unequal bargaining power ….” (Vu v. Prudential Property & Casualty Ins. Co. (2001) 26 Cal.4th 1142, 1151.) “[A]n insurance policy is characterized by elements of adhesion, public interest and fiduciary responsibility.” (Cates Construction Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 44.) Accordingly, “statutes pertaining to, and contractual provisions contained within, insurance policies must be construed in light of applicable public policy, promoting the protection of the insured and the public at large.” (20th Century Ins. Co. v. Superior Court, supra, 90 Cal.App.4th at p.1266.)

Because the primary issue on appeal involves a legal question, the interpretation of a statute (i.e. § 2051), this Court applies de novo review. (Fireman’s Fund Insurance Companies v. Quackenbush (1997) 52 Cal.App.4th 599, 604.) “While the ‘“final responsibility for the interpretation of the law rests with the courts’” ” (Morris v. Williams [(1967) 67 Cal.2d 733, 748], ‘the construction of a statute by officials charged with its administration … is entitled to great weight.’” (Spanish Speaking Citizens’ Foundation, Inc. v. Low (2000) 85 Cal.App.4th 1179, 1214-1215.)

The Commissioner respectfully submits that this Court should afford his interpretation of section 2051 and related insurance statutes great weight. The Commissioner’s expertise and technical knowledge of the insurance statutes he administers, and his agency’s sponsorship of the 2004 legislation that added subdivision (b) to section 2051, support deference to his statutory construction. (Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 12.)

I. BECAUSE THE LOSS SETTLEMENT PROVISIONS IN GARNES’ FAIR PLAN OPEN ACV POLICY CONFLICT WITH SECTION 2051, THEY ARE INVALID AND UNENFORCEABLE

A. Under the Plain Language of Section 2051, Subdivision (b), the Mandatory Measure of Garnes’ Actual Cash Value Recovery Under an Open ACV Policy Is Tied to the Extent of Loss to Her Insured Structure
Section 2051 sets forth the measure of indemnity in an open fire policy. An “open” policy” is “one in which the value of the subject matter is not agreed upon, but is left to be ascertained in case of loss.” (§ 411.) “A loss is either total or partial.” (§ 1960.) “Under an open policy, the measure of indemnity in fire insurance is the expense to the insured of replacing the thing lost or injured in its condition at the time of the injury, the expense being computed as of the time of the commencement of the fire.” (§ 2051, subd. (a).) The “measure of indemnity” means the amount of insurance paid to the policyholder.

Subdivision (b) of section 2051 more specifically sets forth the mandatory measure of the actual cash value recovery under an open ACV policy. That statute provides:
(b) Under an open policy that requires payment of actual cash value, the measure of the actual cash value recovery, in whole or partial settlement of the claim, shall be determined as follows:
(1) In case of total loss to the structure, the policy limit or the fair market value of the structure, whichever is less.
(2) In case of a partial loss to the structure, or loss to its contents, the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury or the policy limit, whichever is less. In case of a partial loss to the structure, a deduction for physical depreciation shall apply only to components of a structure that are normally subject to repair and replacement during the useful life of that structure.

The word “shall” as used in the Insurance Code “is mandatory unless otherwise apparent from the context.” (§ 16.) Because the context of section 2051 does not contain an alternative interpretation of the word “shall,” the measure of the actual cash value recovery in settlement of a claim in an open ACV policy must be determined as prescribed by section 2051, subdivision (b). That measure is expressly tied to the extent of damage to the insured structure.

B. The Commissioner’s View Is Confirmed By the Language of the California Residential Property Insurance Disclosure Statement that an Insurer is Required to Deliver to the Insured Under Section 10102
In 2010, the Legislature enacted section 10101 of the Code, making it operative on July 1, 2011. Because Garnes purchased her FAIR Plan ACV policy just before the current California Residential Property Insurance Disclosure Statement was enacted, FAIR Plan was not required to deliver this disclosure statement to Garnes when it issued her policy. Still, the mandatory Disclosure Statement further confirms the legislative understanding that, for residential property insurance in California, “actual cash value coverage” means the actual cash value recovery for the partial loss to the insured structure, or total loss to the insured structure, set forth in section 2051.

Section 10101 prohibits the issuance or renewal of a California residential property insurance policy unless the named insured is provided a copy of the California Residential Property Insurance Disclosure Statement as prescribed in section 10102. Under section 10102:
(a) The disclosure required by Section 10101 shall . . . be provided prior to or concurrent with, the application for a policy of residential property insurance. . . . * * * * *
The disclosure shall contain the following language:

“NOTICE TO CONSUMERS – CALIFORNIA RESIDENTIAL INSURANCE DISCLOSURE

This disclosure is required by Section 10102 of the California Insurance Code. This form provides general information related to residential property insurance and is not part of your residential property insurance policy. Only the specific provisions of your policy will determine whether a particular loss is covered and the amount payable. The information provided does not preempt existing California law.

PRIMARY FORMS OF RESIDENTIAL DWELLING COVERAGE

You have purchased the coverage(s) checked below. NOTE: Actual Cash Value Coverage is the most limited level of coverage listed. Guaranteed Replacement Cost is the broadest level of coverage.
___ ACTUAL CASH VALUE COVERAGE pays the costs to repair the damaged dwelling minus a deduction for physical depreciation. If the dwelling is completely destroyed, this coverage pays the fair market value of the dwelling at time of loss. In either case, coverage only pays for costs up to the limits specified in your policy.

* * * * *

This statutory description of “actual cash value coverage” is stated in simple, consumer-friendly language and conforms in substance to the measure of actual cash value recovery under an open ACV fire insurance policy set forth in section 2051. Under section 2051, subdivision (b)(2), the measure of actual cash value for partial loss to the structure is the cost to repair the damage less a fair and reasonable deduction for physical depreciation or the policy limit, whichever is less. Where there is total loss to the structure (or, as the section 10102 disclosure statement describes it, “the dwelling is completely destroyed”), the measure of actual cash value is the policy limit or the fair market value of the structure, whichever is less. (§ 2051, subd. (b)(1).) The section 10102 disclosure statement thus confirms the correctness of the Commissioner’s interpretation of section 2051, subdivision (b).

C. The FAIR Plan ACV Policy Provisions Are Invalid and Unenforceable Because They Use a Measure of Indemnity That Conflicts with Section 2051, Subdivision (b)

1. The Measure of Indemnity in Garnes’ Fair Plan ACV Policy Is Not Tied to the Extent of Physical Loss or Damage to the Insured Structure

FAIR Plan issued Garnes a homeowner’s insurance policy for a one-year period beginning December 23, 2010 and ending December 23, 2011. (I AA 1-3.) The FAIR Plan policy sets forth the measure of indemnity used to calculate the amount of insurance money paid for a covered loss which is based upon FAIR Plan’s own definition of the terms “partial loss” and “total loss.” FAIR Plan’s definitions of these terms are not tied to the amount of damage that has occurred to the insured structure.

FAIR Plan tries to define a loss by mere comparison of dollar amounts. Paragraph (5) of FAIR Plan’s policy states in pertinent part:
Loss Settlement. Subject to CONDITION 2. (Insurable Interest and Limit of Liability), we will pay the following amounts for covered property losses:
a. Coverages A and B Losses: For losses to covered property described in Coverage A and/or B, the following rules apply:
(1) Total Loss: If the greater of the cost either to reconstruct or replace the damaged part of the property exceeds the actual cash value before the loss of all covered property described in Coverages A and B, we will pay such actual cash value.
(2) Partial Loss: In the case of losses that are not described in (1) above, we will pay the least of the following amounts:
(a) The lower of the cost either to reconstruct or replace the damaged part of the property, less a reasonable amount for depreciation; or
(b) The actual cash value before the loss of the damaged property.

* * * * *

c. Definitions for Coverages A, B and C Losses . . . the “actual cash value” of property means its fair market value.

(I AA 2-3.)

Under FAIR Plan’s policy, regardless of the extent of physical damage to the insured property, there is a “total loss” if the cost to reconstruct or replace the damaged part of the property exceeds the fair market value of the home before the loss. Any loss other than a “total loss” is a “partial loss.” So, even though the parties here agree that Garnes’ home suffered only partial damage to its structure, FAIR Plan deems her loss a “total loss” and refuses to pay Garnes the cost to repair her home (about “$363,000). Instead, FAIR Plan says it only must pay Garnes the fair market value of her home before the fire, or $75,000.

2. FAIR Plan’s Definitions of “Partial Loss” and “Total Loss” in the Policy’s Loss Settlement Provisions Conflict with Section 2051, Subdivision (b)
In its motion for summary judgment, FAIR Plan maintained that the terms “total loss” and “partial loss” are not defined by statute, leaving Fair Plan free to define those terms as it sees fit. Having defined “total loss” and “partial loss” in the policy in economic terms (where the cost to repair exceeds fair market value) rather than in terms of the extent of damage to the structure of the insured property, FAIR Plan successfully argued that this case should be resolved based on contract and statutory interpretation. (I AA 25.) But FAIR Plan’s argument forced the trial court to decide the wrong issue, or at best the issue in the wrong context. FAIR Plan’s policy used invalid and unenforceable terms.

As used in the property insurance context, the ordinary meaning of the terms “total loss” and “partial loss” logically refer to the extent of damage to the insured property. “A loss is either total or partial.” (§ 1960.) Black’s Law Dictionary defines “total loss” as:

The complete destruction of insured property so that nothing of value remains and the subject matter no longer exists in its original form. Generally, a loss is total if, after the damage occurs, no substantial remnant remains standing that a reasonably prudent uninsured owner, desiring to rebuild would use as a basis to restore property to its original condition.

(Black’s Law Dict. (10th ed. 2014) p. 1088.) “Partial loss” is defined as “[a] loss of part of the insured property; damage not amounting to a total loss.” (Ibid.) Even the California Residential Property Insurance Disclosure Statement describes what actual cash value coverage is “[i]f the dwelling is completely destroyed.” (§ 10102.) This reference echoes the reference to “total loss to the structure” in section 2051.

In any event, even if the terms “total loss” and “partial loss” were not defined by statute, FAIR Plan would not be free to alter its obligation by measuring actual cash value in a way that conflicts with section 2051. Although the FAIR Plan loss settlement provisions in Garnes’ policy may be clear, they are invalid and unenforceable because they reduce FAIR Plan’s statutory obligation to pay Garnes the actual cash value for the partial loss to the structure of her home as required by section 2051. (Wildman v. Government Emp. Ins. Co. (1957) 48 Cal.2d 31, 39-40 (policy provision that conflicted with Vehicle Code financial responsibility requirement is void and unenforceable); Contreras v. America, Compania General De Seguros, S.A. (1975) 48 Cal.App.3d 270, 283 (where lesser coverage limit in auto insurance policy was inconsistent with statute and therefore illegal and unenforceable, the applicable statutory coverage requirements must be read into the policy since they are a part of it.)
II. UNDER CURRENT LAW, THE TERM “ACTUAL CASH VALUE” USED IN THE STANDARD FORM FIRE INSURANCE POLICY (SECTION 2071) IS NOT SYNONYMOUS WITH “FAIR MARKET VALUE”

A. FAIR Plan’s Erroneous Argument that the Term “Actual Cash Value” Means “Fair Market Value” Is premised on Case Law that Was Superseded by Section 2051, subdivision (b), in Part
FAIR Plan contends that under the Standard Form Fire Insurance Policy (hereinafter “Standard Form”) set forth in section 2071, the liability limit of a homeowner’s insurance policy is capped at “the actual cash value of the property” at the time of the loss and that “actual cash value of the property” is synonymous with “fair market value.” In support, FAIR Plan relies upon Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398, 402 which held that “’[a]ctual cash value,’ as used in section 2071 of the Insurance Code, is synonymous with ‘fair market value.’”

FAIR Plan also cites Cheeks v. California FAIR Plan Association (1998) 61 Cal.App.4th 423, which agreed with Jefferson that the term “actual cash value” is synonymous with fair market value. (Respondent’s Brief (“RB”), p. 10.) Thus, FAIR Plan maintains, “if the cost to repair or replace the damaged property is more than its fair market value, then, according to the plain language of section 2071, there is no coverage for the repair or replacement cost to the extent it exceeds the actual cash value of the property [i.e., fair market value].” (Ibid.)

That argument misconstrues section 2071 and ignores the necessary interplay between that statute and section 2051. The terms “actual cash value” and “fair market value” are no longer synonymous under all circumstances, because the Legislature’s 2004 amendment of section 2051 supersedes Jefferson and Cheeks, in part. Section 2051 did not repeal section 2071 – rather, it provided a clear and consistent measure of actual cash value that informs the reference to the term “actual cash value” in 2071. Thus, sections 2051 and 2071 do not conflict and must be read together to effectuate the intent of the Legislature.

Under section 2070, fire policies issued in California are required to be on the Standard Form. However, any policy providing coverage against the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the Standard Form, provided that “coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.” (Ibid.)

The Standard Form is set forth in section 2071, subdivision (a):
(a) The following is adopted as the standard form of fire insurance policy for this state:

California Standard Form Fire Insurance Policy

* * * * *

In consideration of the provisions and stipulations herein or added hereto and of __________ dollars premium this company, for the term of __________from the __________________ day of ____________, 20________ ) to the ____________________ day of ____________, 20_________ ) At 12:01 a.m., standard time, at location of property involved, to an amount not exceeding __________ dollars [policy limit], does insure __________ and legal representatives, to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair, and without compensation for loss resulting from interruption of business or manufacture, nor in any event for more than the interest of the insured * * * * *

FAIR Plan states that “the language ‘to the extent of the actual cash value of the property’ in section 2071 governs this appeal” and argues that Garnes is only entitled to recover the fair market value of her home prior to the fire. (RB, p. 11.) But FAIR Plan’s interpretation of section 2071 rests primarily on Jefferson and Cheeks, which were decided long before the Legislature amended section 2051 in 2004 to prescribe the measure of actual cash value recovery in the case of either total or partial loss to the insured structure. These decisions therefore have been superseded to the extent they conflict with section 2051.

The Legislature is presumed to be aware of statutes (e.g. section 2071) and existing judicial precedent (e.g. Jefferson and Cheeks), and to have amended section 2051 in light of this knowledge. (In re W.B., Jr. (2012) 55 Cal.4th 30, 57; In re D.S. (2012) 207 Cal.App.4th 1088, 1101.) In this case the legislative history of Assembly Bill 2962 (“AB 2962”) confirms that the Legislature was specifically aware of the existence of sections 2070 and 2071 when it amended section 2051. (Garnes’ Request for Judicial Notice (“RJN”), Exhibit A, p. 25 – see description of existing law in March 18, 2004 “Background Information Sheet” for Assembly Insurance Committee re AB 2962.) Moreover, the Legislature also was aware of the legal impact of the bill on existing case law. The State and Consumer Services Agency’s 2004 enrolled bill report for AB 2962, specifically referenced the Jefferson case. (Garnes’ RJN, Exh. A, p. 127.)

Further, courts “do not construe statutes in isolation, but rather read every statute ‘with reference to the entire scheme of law of which it is part so that the whole may be harmonized and retain effectiveness.’ (Clean Air Constituency v. California State Air Resources Board (1974) 11 Cal.3d 801, 814.) To understand the necessary interplay between sections 2051 and 2071 which are part of chapter 2 (“The Fire Insurance Contract”) of Part 1 of Division 2 of the Insurance Code, the following italicized language of the Standard Form, quoted below, must be closely scrutinized and explained.
At 12:01 a.m., standard time, at location of property involved, to an amount not exceeding __________ dollars [policy limit], does insure __________ and legal representatives, to an amount not exceeding __________ dollars [policy limit], does insure __________ and legal representatives, to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, . . .
(Italics added.) The phrase “to an amount not exceeding _____dollars” in the Standard Form refers to the policy limit. The phrase “to the extent of the actual cash value of the property at the time of loss” must be interpreted in conformity with section 2051, subdivision (b).

The language of the Standard Form prescribed by section 2071 sets forth the insurer’s limit of liability. That language requires the insurer to pay the lesser of (1) the policy limit or (2) the actual cash value of the property at the time of loss.

Section 2051 necessarily informs the proper interpretation of the phrase “actual cash value of the property at the time of loss” used in section 2071. Thus, in the case of a “total loss to the structure” the actual cash value recovery is the policy limit or the fair market value of the structure, whichever is less. (§ 2051, subd. (b)(1).) In the case of “partial loss to the structure,” the actual cash value recovery is the cost to repair or replace the property lost or injured less a fair and reasonable deduction for physical depreciation, or the policy limit, whichever is less. (§ 2051, subd. (b)(2).)

The qualifying language in section 2071, that is – “but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or construction by reason of any ordinance or law regulating construction or repair” – does not conflict with section 2051. This language simply clarifies that in the case of a partial loss to the structure, the insurer is only obligated to pay the amount of the cost to repair or replace the property with material of like kind and quality and not any increased cost due to an ordinance or law regulating construction or repair.

B. Regulation 2695.9(f)(1) Specifically Provides that Under A Policy Subject to Section 2071 the Measure of Actual Cash Value Recovery Is Determined As Set Forth in Section 2051

Regulation 2695.9, subdivision (f)(1) [10 Cal. Code. Regs. § 2695.9(f)(1)]; provides that under a policy subject to section 2071, the measure of recovery is determined by the actual cash value of the damaged or destroyed property as set forth in section 2051:

Under a policy, subject to California Insurance Code Section 2071, where the insurer is required to pay the expense of repairing, rebuilding or replacing the property destroyed or damaged with other of like kind and quality, the measure of recovery is determined by the actual cash value of the damaged and destroyed property, as set forth in California Insurance Code Section 2051.
(Italics added.) This regulation has the force and effect of law. (Dabis v. San Francisco Redevelopment Agency (1975) 50 Cal.App.3d 704, 706.)

Under Regulation 2695.9, subdivision (f)(1) , neither section 2051 nor section 2071 limits Garnes’ maximum recovery to the fair market value of her home prior to loss. Because it is undisputed that Garnes suffered partial loss to the structure of her home due to a fire, FAIR Plan is required to pay her the amount it would cost to repair or rebuild her home, less a fair and reasonable deduction for physical depreciation based on its condition at the time of the fire damage, or the policy limit, whichever is less. (§§ 2051, subd. (b)(2), 2071; Reg., 2695(f)(1).) The stipulated cost to repair Garnes’ home, less fair and reasonable deduction for physical depreciation, is $362,670.23. (I AA 8-9). Since that amount is less than her $425,000 policy limit, FAIR Plan is obligated to pay her $362,670.23 – not merely the home’s fair market value of $75,000.

III. SECTION 2051’S HISTORY REFLECTS LEGISLATIVE INTENT TO PROTECT CONSUMERS AND REDUCE LITIGATION BY MANDATING A CLEAR MEASURE FOR CALCULATING THE “ACTUAL CASH VALUE” RECOVERY IN AN OPEN ACV FIRE POLICY THAT IS TIED TO THE EXTENT OF LOSS TO THE INSURED STRUCTURE

The Commissioner submits that the usual, ordinary meaning of section 2051’s words eliminates any ambiguity in the language of the statute. (In re Lucas (2012) 53 Cal.4th 839, 849 (words of a statute should be given their ordinary and usual meaning and should be construed in their statutory context); Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc. (2005) 133 Cal.App.4th 26, 29 [“If there is no ambiguity in the language, [the court presumes] the Legislature meant what it said, and the plain meaning of the statute governs.”] (quoting Hunt v. Superior Court (1999) 21 Cal.4th 984, 1000.)

If, however, this Court determines section 2051 is ambiguous, it may resort to extrinsic evidence, including the legislative history of the statute, to ascertain the intent of the Legislature and construe it so as to effectuate the purpose of the law. (State Farm Mut. Auto. Ins. Co. v. Garamendi (2004) 32 Cal.4th 1029, 1043.) When statutory “language is susceptible of multiple interpretations, ‘the court looks “to a variety of extrinsic aids, including the ostensible objects to be achieved, the evils to be remedied, the legislative history, public policy, contemporaneous administrative construction, and the statutory scheme of which the statute is a part.” [Citations.] (Lopez v. Superior Court (2010) 50 Cal.4th 1055, 1063.) “After considering these extrinsic aids, [the court] ‘must select the construction that comports most closely with the apparent intent of the Legislature, with a view to promoting rather than defeating the general purpose of the statute, and avoid an interpretation that would lead to absurd consequences. (Citations omitted.)’” (Ibid.) Garnes has filed a request for judicial notice of the legislative history of section 2051 as amended by AB 2962. Assuming that the Court grants Garnes’ request, the Court will find that key documents in that legislative history support the Commissioner’s and Garnes’ interpretation of section 2051.
“[I]t is well established that reports of legislative committees and commissions are part of a statute’s legislative history and may be considered when the meaning of a statute is uncertain.” (Huntnick v. U.S. Fidelity & Guaranty Co. (1988) 47 Cal.3d 456, 465, fn. 7.) “The rationale for considering committee reports when interpreting statutes is … [that] it is reasonable to infer that those who actually voted on the proposed measure read and considered the materials presented in explanation of it, and that the materials therefore provide some indication of how the measure was understood at the time by those who voted to enact it.” (Ibid.) In addition, courts “have routinely found enrolled bill reports, prepared by a responsible agency contemporaneous with passage and before signing, instructive on matters of legislative intent.” (Eisner v. Uveges (2004) 34 Cal.4th 915, 934, fn. 19.)

Section 2051 was amended in 2004 by AB 2962. (Garnes’ RJN, Exhibit A, pp. 1-18.) This legislation was sponsored by the California Department of Insurance. (See Senate Committee on Insurance, “Background Information Request,” Garnes’ RJN, Exh. A, p. 66, ¶ 6, and p. 135 – see letter dated August 20, 2004, from Insurance Commissioner John Garamendi to Governor Arnold Schwarzenegger, verifying that the California Department of Insurance was the sponsor of AB 2962.)

The unprecedented destruction of homes by devastating wildfires in Southern California in 2003 created a need to amend section 2051 to clarify how “actual cash value” should be determined. The Background Information Sheet for the Assembly Insurance Committee described the need:

In October of 2003, Southern California suffered the most devastating wildfires seen in over a decade. The firestorm tragically took the lives of 22 people and destroyed more than 3,500 homes from Simi Valley into San Diego County. It will take homeowners years to fully recover from the unprecedented destruction caused by the wildfires. There will also be an enormous demand from affected homeowners making claims on their homeowner insurance policies.

Many homeowners policies do not clearly define how “actual cash value” will be determined. In addition, when calculating the actual cash value, most insurance companies deduct the cost of the labor. This results in the consumer having to pay out-of-pocket costs for a portion of the repairs. Some insurance companies have ignored the Department of Insurance’s position that labor necessary to repair or replace the property should not be deducted from settlements.

This bill will explain and provide consistency for how claims will be adjusted and prohibit insurance companies from deducting the cost in labor in settlements.
(Garnes’ RJN, Exh. A, pp. 25-26, italics added.)

While considering AB 2962, the Legislature specifically was made aware of the existing law, including (1) the provisions of then existing section 2051, (2) the Standard Form prescribed by section 2071, and (3) the requirement that “[i]nsurance policies issued in California cannot be less favorable to the consumer than the standard fire form (Insurance Code Sections 2070 and 2071).” (Assembly Insurance Committee “Background Information Sheet,” Garnes’ RJN, Exh. A, p. 25.) The Legislature also was made aware of the problem that the “California Residential Property Insurance Disclosure provides coverage definitions; however, the valuation of property is unclear and continues to be an issue between insurance companies and consumers (Insurance Code Section 10102).” (Ibid.)
In amending section 2051, AB 2962 retained the original provisions of the statute and designated them subdivision (a).

(a) Under an open policy, the measure of indemnity in fire insurance is the expense to the insured of replacing the thing lost or injured in its condition at the time of the injury, such expense being computed as of the time of the commencement of the fire.

(See Stats. 1935, c. 145, p. 595.) AB 2962 added subdivision (b), which sets forth the mandatory measure of actual cash value recovery under an open ACV fire policy depending upon the extent of physical damage or loss to the insured structure (“total loss to the structure” (§ 2051, subd. (b)(1)) or “partial loss to the structure” (§ 2051, subd. (b)(2).) (Stats. 2004, c. 605, § 2.) (Garnes’ RJN, Exh. A, pp. 20-22.) AB 2962 also added section 675.1 which provides, among other things, that “[i]n the case of a total loss to the primary insured structure under a residential policy,” the insurer is prohibited from canceling coverage while the primary insured structure is being rebuilt, except for specified reasons.” (Stats. 2004, c. 605, § 1, italics added.) (Garnes’ RJN, Exh. A, pp. 20-21.) Thus, in adding subsection (b) to section 2051, and in enacting section 675.1, the Legislature intended these statutory provisions to apply depending upon the extent of physical damage to the insured structure.

As described in a Senate Committee on Insurance analysis of AB 2962, the bill was meant to “clarify the measurement of ‘actual cash value’ under a homeowner’s insurance policy and to provide protections against cancellation during the rebuilding process.” (Garnes’ RJN, Exh. A, p.69.) Statements in support of the bill indicated that the amendment of section 2051 may “help resolve disputes between insurers and policyholders.” (See “Arguments in Support” in Sept 10, 2004 Enrolled Bill Memorandum to the Governor, Garnes’ RJN, Exh. A, p. 121.)
The author of the bill believed that consistency in the calculation of “actual cash value” would protect consumers.
According to the author’s office, many homeowners’ policies do not clearly define how “actual cash value” will be determined. The bill is needed to provide consistency in the calculation of “actual cash value”. Consistency will further protect consumers.

(See “Support” in Senate Committee on Insurance analysis, Garnes’ RJN, Exh. A, p.69.)

The purpose of the bill was further described in an Assembly Committee on Insurance analysis:

COMMENTS: The purpose of the bill, according to the author, is to explain and provide consistency for how claims will be adjusted and prohibit insurance companies from deducting the cost of labor in settlements. The author states that many homeowners’ policies do not clearly define how “actual cash value” is to be determined, and additionally, when calculating this value, most insurance companies deduct the cost of labor. Thus supporters believe that consumers are forced to pay out-of-pocket costs for a portion of the repairs. The author believes that this bill would clarify the measurement of “actual cash value” in relation to a homeowner’s insurance policy.

Furthermore, the author of the bill highlights the California Residential Property Insurance Disclosure [§ 10102] provides coverage definitions; however, the valuation of property is unclear and continues to be an issue between insurance companies and consumers.

(Garnes’ RJN, Exh. A, pp. 44-45, italics added.) These legislative committee analyses constitute cognizable legislative history for the purposes of statutory construction. (Santangelo v. Allstate Ins. Co. (1998) 65 Cal.App.4th 804, 814 (Assembly Committee on Insurance analysis); Guillemin v. Stein (2002) 104 Cal.App.4th 156, 166 (Senate Rules Committee analysis).)

The Commissioner’s interpretation and application of section 2051 effectuates the Legislature’s intent to provide clarity and consistency in calculating actual case value recovery in an open ACV policy. FAIR Plan’s approach would create the uncertainty the Legislature intended to eliminate and would provide inadequate protection to insureds seeking to repair their partially damaged homes.
IV. FAIR PLAN’S FAILURE TO PROVIDE FIRE COVERAGE THAT IS SUBSTANTIALLY EQUIVALENT TO THAT PROVIDED BY THE STANDARD FORM CONTRAVENES THE LEGISLATIVE PURPOSE FOR FAIR PLAN’S CREATION AND DEPRIVES ECONOMICALLY DISADVANTAGED INSUREDS OF THE ABILITY TO REPAIR THEIR HOMES

FAIR Plan is a legislatively-created association of insurers of last resort that is authorized to issue “basic property insurance” in California to those who cannot otherwise obtain such insurance in the normal insurance market. (§ 10090 et seq.) The Basic Property Insurance Inspection and Placement Plan (ch. 9 (commencing with § 10090) of Part 1 of Div. 2) (hereinafter, “the Basic Property Insurance Plan”), which created FAIR Plan and the rules that govern it, were enacted by AB 1577 in 1968. (Stats. 1968, c. 574, p. 1239, § 1.)

AB 1577 required “an industry placement facility and joint reinsurance association [FAIR Plan] be established to be governed by a committee of five and to include all admitted insurers in the state who write basic property insurance. . . . The association is required to devise a program to provide for assessments of member insurers to cover association costs, inspection of property, limits of liability, underwriting standards for determining risks, and commission to be paid to producers.” (Commissioner’s Request for Judicial Notice (“RJN”), Exhibit A, July 1, 1968 Legislative Analyst’s “Analysis of Assembly Bill No. 1577 (Moretti).) “The statute was adopted as an urgency measure, due to the critical situation as to the availability of insurance in the brush fire exposure areas of Southern California.” (Commissioner’s RJN, Exhibit B, Letter from Richard Roddis, former Insurance Commissioner to Hon. Vernon Sturgeon, Legislative Secretary-Senate, as part of Enrolled Bill Report for AB 1577.)

Pursuant to section 10095, FAIR Plan submitted its Plan of Operation to the Commissioner. (Commissioner’s RJN, Exhibit C.) Section 10090 sets out the purposes of the Basic Property Insurance Plan as follows.
(a) To assure stability in the property insurance market for property located in the State of California.
(b) To assure the availability of basic property insurance as defined by this chapter.
(c) To encourage maximum use, in obtaining basic property insurance, of the normal insurance market provided by admitted insurers and licensed surplus line brokers.
(d) To provide for the equitable distribution among admitted insurers of the responsibility for insuring qualified property for which basic property insurance cannot be obtained through the normal insurance market by the establishment of a FAIR Plan (fair access to insurance requirements), an industry placement facility and a joint reinsurance association.

The term “basic property insurance” is defined by section 10091, subdivision (c) to mean:

insurance against direct loss to real or tangible personal property at a fixed location in those geographic or urban areas designated by the commissioner, from perils insured under the standard fire policy and extended coverage endorsement and vandalism and malicious mischief and such other insurance coverages as may be added by the insurance placement facility with the approval of the commissioner or by the commissioner, but shall not include insurance on automobile or farm risks.

Section 10098 provides that acceptance of risks assigned under the Basic Property Insurance Plan and performance of any act required by that Plan is a condition of the right to continue to hold a certificate of authority to transact insurance business in California. (§ 10098.) As a result, participation in the program is compulsory for all licensed carriers transacting basic property insurance within the state.

To whatever extent FAIR Plan’s ACV policy does not provide substantially equivalent or greater coverage to Garnes than that afforded by the Standard Form, which necessarily incorporates the measure of actual cash value recovery set forth in section 2051, subdivision (b), the legislative intent and very purpose in creating FAIR Plan (i.e., to assure the availability of basic property insurance) are contravened. (§ 10090, subd. (b).) FAIR Plan is the insurer of last resort for those who cannot afford basic property insurance in the normal insurance market. With an actual cash value policy, the insured is getting the least amount of coverage. In comparison, “[u]nder an open policy that requires payment of the replacement cost for a loss, the measure of indemnity is the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured, without a deduction for physical depreciation, or the policy limit, whichever is less.” (§ 2051.5, subd. (a), italics added.)
FAIR Plan is wrong in contending that “the benefits Garnes seeks in this litigation would have been available had she purchased a replacement cost policy rather than an actual cash value policy” and section 2071 should not be construed to permit her to “transform” her ACV policy into a replacement cost policy. (RB at p. 19.) FAIR Plan’s arguments and misinterpretation of section 2071 are based upon its incorrect assumption that “actual cash value” is synonymous with “fair market value.” If Garnes had purchased a replacement cost policy she would have been covered for the cost to repair her partially damaged home, without a deduction for physical depreciation. (§ 2051.5, subd. (a).) What she seeks here is the actual cash value recovery afforded her under sections 2051 and 2071, that is, the cost to repair, less a deduction for fair and reasonable depreciation.

V. BECAUSE FAIR PLAN’S ACV POLICY WAS NOT APPROVED BY THE INSURANCE COMMISSIONER, ITS NONCONFORMING LOSS SETTLEMENT PROVISIONS ARE UNENFORCEABLE

A. Fair Plan Failed to Use the Required Standard Form Prescribed by Section 2071, and Did Not Seek the Commissioner’s Permission to Use Its Modified ACV Policy Form
The Basic Property Insurance Plan requires FAIR Plan to submit for the Commissioner’s review and approval a proposed plan of operation (“Plan of Operation”) that is consistent with the provisions of chapter 9 (commencing with section 10090) of Part 1 of Div. 2. (§ 10095, subd. (a).) FAIR Plan’s original Plan of Operation was adopted in 1968 and has been amended several times since then. (Commissioner’s RJN, Exhibit C.)

An important provision of the original Plan of Operation, however, remains unchanged today. Division I, Section VII, of the Plan of Operation provides:
Section VII – Standard Policy Coverage

All policies issued shall be for Basic Property Insurance on standard policy forms, except as modified with permission of the Commissioner, and shall be issued for a term of one year.
The term “basic property insurance” means: insurance against direct loss to real or tangible personal property at a fixed location in those geographic or urban areas designated by the commissioner, from perils insured under the standard fire policy and extended coverage endorsement and vandalism and malicious mischief and such other insurance coverages as may be added by the insurance placement facility with the approval of the commissioner or by the commissioner, but shall not include insurance on automobile or farm risks.
(§ 10091, subd. (c), italics added.)

FAIR Plan’s Plan of Operation specifically requires that all policies it issues must be for basic property insurance on standard policy forms. FAIR Plan’s ACV policy does not comply with the Standard Form prescribed by section 2071. To use a modified policy form, FAIR Plan was required to obtain the Commissioner’s permission. (Commissioner’s RJN, Exhibit C, FAIR Plan’s Plan of Operation, § VII, quoted above.) It failed to do so. (Commissioner’s RJN, Exhibit D.)

B. The Department Recently Rejected Fair Plan’s First Policy Form Filing Submitted for Review, Because the Form Conflicts With Section 2051
On April 8, 2015, for the first time, FAIR Plan submitted its policy form filing for review through the Department’s rate and form filing system. The Department acknowledged FAIR Plan’s policy form filing on May 4, 2015.

After review, the Department rejected FAIR Plan’s policy form filing because it conflicts with section 2051. (See Commissioner’s RJN, Exhibit D, June 18, 2015 letter from Risa Salat-Kolm, attorney for the Department, to Anneliese Jivan of FAIR Plan).

The submitted policy form contains policy language that is not in compliance with California law, specifically California Insurance Code (CIC) section 2051. The policy form contains a Loss Settlement provision that misstates how Actual Cash Value (ACV) is required to be measured for both a “total loss to the structure” and “partial loss to the structure”. * * * * *
In addition, Fair Plan’s definition of “depreciation” (also under its Loss Settlement provision) is not in compliance with CIC Section 2051(b)(2). This statute only permits “physical” depreciation or depreciation caused by wear and tear. Therefore, the inclusion of “exhaustion” and “obsolescence” is not permissible.
C. The Department Earlier Rejected FAIR Plan’s Request for Approval of Its California Residential Insurance Disclosure Form

About eight months prior to the Department’s rejection of FAIR Plan’s policy form filing, FAIR Plan attempted to obtain the Department’s approval of modifications to its California Residential Insurance Disclosure form, which contained its own definition of “actual cash value,” a definition that conflicts with section 2051. Every insurer is required to provide this disclosure form to an insured before issuance or renewal of a policy of residential property insurance, and the form may only be modified with the Commissioner’s approval. (§§ 10101, 10102, 10106.)

In March 2014, during the pendency of the Garnes’ case, FAIR Plan sought the Department’s approval to modify its disclosure form to amend, among other things, the description of “actual cash value coverage” in conformity with the loss settlement provisions in FAIR Plan’s policy. The Department determined that not only did FAIR Plan’s proposed amendments to the disclosure form conflict with sections 2051 and 2071, but FAIR Plan’s policy form also contained the same invalid definition of “actual cash value.” In a letter dated November 12, 2014, the Department rejected the proposed modification of the disclosure form and also informed FAIR Plan that its policy form must be amended to remove the unlawful language that conflicts with section 2051. (Commissioner’s RJN, Exhibit E, November 12, 2014 letter from R. Salat-Kolm to Elise Klein, Esq.)

About five months later, on April 8, 2015, FAIR Plan submitted its policy form filing for the Department’s approval. That policy form contained the same unlawful language the Department had previously indicated conflicts with section 2051 and should be removed. On June, 18, 2015, the Department officially rejected FAIR Plan’s policy form filing. (Commissioner’s RJN, Exhibit D.)

To the extent that FAIR Plan takes the position that it has been using the subject policy form (at issue here) for many years without objection from the Department, this is of no legal moment. No matter how long FAIR Plan has been using the improper and unapproved policy form, it lacked authority to use the policy form since, prior to April of 2015, FAIR Plan never formally submitted the policy form to the Department for permission to use it. As of June 18, 2015, FAIR Plan’s policy form filing has been rejected by the Department.