Measure of Indemnity for State Farm Replacement Cost Policy Todd Mathers asked 1 year ago
Measure of Indemnity for State Farm Replacement Cost Policy

We suffered a fire last year that led to the partial loss of our home. Repairs have not started because we are arguing with our insurance company about the settlement amount and the extent of the damage. We have a replacement cost policy that makes no mention of ACV. In the Xactimate estimate produced by State Farm it only shows replacement cost values for materials. The State Farm generated estimate makes no mention of depreciation or ACV. It only lists replacement costs.

State Farm insists we are not entitled to the actual costs incurred to repair or replace the damaged areas of our home. Instead, State Farm says the measure of indemnity is defined by both Insurance Code Section 2051 and 2051.5. How can there be two measures of indemnity? Obviously Insurance Code Section 2051 says, “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.” State Farm has latched on to the phrase, “the expense being computed as of the time of the commencement of the fire.”

The fire occurred on March 20, 2022. State Farm says it will only pay to repair or replace the home without a deduction for depreciation using the Xactimate price list not from “the time of the commencement of the fire” from Insurance Section 2051 as they chose to quote in the letter to us, but instead using the arbitrary time of August 2022. State Farm adjusted our contractors Xactimate estimate produced in June of 2023 using the Xactimate price list from August of 2022. State Farm says we are not entitled additional payment if the actual costs we incur are higher than the August 2022 Xactimate prices.

I am confused how a replacement cost policy can be interpreted in the way that State Farm is interpreting it. The policy language seems clear:

“We will pay up to the applicable limit of liability shown in the Declarations, the reasonable and necessary cost to repair or replace with similar construction and for the same use as on the premises shown in the Declarations, the damaged part of the property covered under SECTION I —PROPERTY COVERAGES, COVERAGE A —DWELLING.”

State Farm isn’t even following its own definition of the measure of indemnity that it quoted in its letter to us: “the expense being computed as of the time of the commencement of the fire.” It chose the arbitrary date of August of 2022 in its timing of loss computation, not the “time of the commencement of the fire”, which was around 2pm on March 20, 2022.

This property insurance coverage blog had an interesting take on using the “time of loss”. Please read the comments on the post for a full explanation of the author’s thoughts. The post says that insurance companies arguing the cost to repair damaged property must be calculated by using the price of labor and construction materials as of the time of the commencement of the fire aren’t thinking things through. The author argues that it would cost a fortune to repair or replace damage as the fire begins to rage. He argues that you’d have to pay a contractor or engineer an exobitant rate to drop everything and repair the property as a fire is burning.

One last thing, State Farm says Insurance Code 2051 AND 2051.5 apply to our replacement cost policy but in California Fair Plan Association v. Garnes the Court stated, “Section 2051 sets forth the “measure of indemnity in fire insurance” for an open ACV policy.” It seems that the Court has spoken that Insurance Code 2051 applies to ACV policies, not all open policies.

How can I get State Farm to pay for the actual incurred costs of our repairs as opposed to paying for costs using an Xactimate price list from some arbitrary date of their choosing?

1 Answers
Demian Oksenendler Demian Oksenendler Expert answered 1 year ago

My interpretation is that the insurer has essentially an option of what to pay as replacement cost, based on when it chooses to pay. Under Ins. Code 2051, if the insurer pays the replacement cost all at once, then it must pay the amount of the loss as of the time of the commencement of the fire. (As a side note, I think “commencement” of the fire would also be a pretty expensive moment to try to rebuild – the statute does not say the “date” of the commencement of fire, just “commencement,” which would be the very moment it started.)

Alternatively, under Ins. Code 2051.5, if the insurer pays ACV first, and forces the insured to incur rebuild costs before paying the rest, then it has to pay the balance of the amounts “reasonably paid” to do the work.

So, here, if the insurer wants to use an outdated price list, then it has to pay at least the full replacement cost as of the date of the fire. Otherwise, if it wants to pay only ACV first, then it will have to pay amounts reasonably spent later on. The insurer might argue that the amounts “reasonably spent” would be capped as of the date of the commencement of the fire, but that will be a tough hill to climb, as it could not show anyone would do the job for that price. Instead, the amount of the job is the amount of the job. Alternatively, a middle ground could be that the amount “reasonably paid” is tied to the date that the insurer paid the replacement cost money to the insured, as they theoretically could have paid that entire amount to the builder at that time.

Another issue here is the application of 10 C.C.R. 2695.9(d). From the information provided, it sounds like the insurer is trying to tie its payments to Xactimate. However, under 10 C.C.R. 2695.9(d), if the insureds demand it, the insurer must produce a contractor who would do the work for the price it wants to pay, or else pay what the insureds’ contractor is asking, or otherwise “adjust” the claim. When we introduce Insurance Code 2051 and 2051.5 to this mix, that means it will have to find a contractor who would have done the work for the Xactimate price as of the date of the fire (or for the amount reasonably paid). If it cannot, then the insurer is essentially stuck with the insureds’ numbers.