Do You Owe The Policy Limits? Unveiling the Mystery of Valued Policy Laws – Claims Magazine

Published in Claims 1996

Currently there are 19 states which have valued policy laws: Arkansas, Florida, Georgia, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas, West Virginia, and Wisconsin. For the purposes of this article, valued policy laws are law which, under some circumstances, force an insurer to pay the limit of liability shown in the policy declarations for a loss, even if the policy terms provide for loss payment of less than that limit of liability.

Other states have statutes which may also increase the accounts payable. For example, California's law only creates a valued policy if the insured specifically requests it. The request operates to force the insurer to examine the building (at the policy applicant's expense, however) and to insert a fixed-value clause in that policy, specifically alerting the insurer to the valued nature of the coverage. There is no statutory prohibition on the insurer charging a higher rate for such valued coverage. As another example, Iowa has statutes which create a rebuttable presumption that the value of any insured building is the amount stated in the policy. Thus, in Iowa, the insurer has the burden to prove that the amount payable for any building loss should be based on some lower value.

The purpose of valued policy statutes is "to prevent insurance companies from over-valuing the insured structure for premium purposes, thereby allowing them to collect an excess premium and later contest the value when there is a loss." Filiatreau v. Allstate Ins. Co., 358 S.E.2d 829, 832 (W. Va. 1987).

While valued policy laws vary from state to state, they do share a few common elements. First, all of the valued policy statutes apply to some type of real property (usually listed as buildings and structures). Second, all of the statutes include fire as a peril. Third, all of them apply to total losses. However, the list of common elements ends at this point.

In addition to applying to some type of real property, a small number of statutes also govern losses to personal property. Florida includes mobile homes and manufactured buildings, Louisiana provides a limited valued policy statute for movables, and Montana applies its valued policy law to items of personal property that are specifically listed and valued in the policy. Missouri is particularly confusing in light of the fact that while one statute specifically states that the valued policy and accompanying laws only apply to real property, Missouri courts have consistently held that the statute also applies to personal property.

Many of the states also include losses by perils in addition to fire. For example, in Florida, the valued policy statute applies to total losses by a "covered peril," and applies to partial losses by fire or lightning. The other states that have additional perils include Kansas (fire, tornado, windstorm, or lightning), Minnesota (fire, lightning, or other hazard), Nebraska (fire, tornado, windstorm, lightning, or explosion), New Hampshire (fire or lightning), North Dakota (any covered cause of loss), Ohio (fire or lightning), South Dakota (fire, tornado, or lightning), and West Virginia (fire or otherwise). Iowa, Louisiana, Montana, and Wisconsin do not clearly specify what, if any, other perils are included.

Likewise, while all of the statutes can be said to apply to total losses, a handful of statutes mention the insurer's liability for partial losses as well (i.e., the actual or full amount of the loss). These include California, Florida, Minnesota, Missouri, New Hampshire, North Dakota, South Carolina, and West Virginia.

In addition to the main elements (types of property, applicable perils, and total versus partial losses), other issues that are specifically addressed in some of the valued policy laws and accompanying statutes are: (1) other insurance; (2) the insurer's option to repair or replace; (3) coinsurance; (4) depreciation; (5) overinsurance (including refund to insured); (6) insurable interest; (7) cancellation; (8) proof of loss; (9) value of the property; (10) required or suggested inspection by the insurer; (11) change of risk; (12) misrepresentation or fraud on the part of the insured; (13) insurable interest; (14) replacement cost coverage; (15) blanket coverage; (16) effect of provisions in a fire policy that differ from the valued policy law; (17) applicability to builders' risk policies; and (18) special exceptions for losses that occur within a certain time period.

If the state's statute is unclear about a particular issue, the state's administrative code, insurance commissioner, or case law may address that issue. For example, while Mississippi's valued policy statute does not address the issue, in Southern Discount Corp. v. St. Paul Fire & Marine Ins. Co. , 368 F. Supp. 1378 ( S. D. Miss.1974), the court held that the valued policy statute nullified the insurer's option to rebuild or replace.

As another example, Missouri's valued policy statute allows a deduction for depreciation in cases of total loss. However, in West v. Shelter Mut. Ins. Co., 864 S.W.2d 458 (Mo. Ct. App. 1993), the court held that while the measure of damages for the total destruction of a house is the value stated in the policy, less depreciation from the date of the policy to the time of the loss, the insurer has the burden of proving the amount of any alleged depreciation. Similarly, while the measure of damages for the total destruction of the contents of the house is the policy amount less depreciation, the insured has the burden of proving lack of depreciation.

Two of the most troublesome issues in applying valued policy laws are blanket coverage and constructive total losses. First, what if the insured's policy contains a blanket limit and there is a total loss to only one building covered under the limit? Of the few states that have addressed the issue, the result has been that the valued policy does not apply unless all of the blanketed items are a total loss. The valued policy law should not apply to items covered under a blanket basis unless there is a total loss of all the property because the valued policy law is not triggered until there is a total loss to the property insured for a particular limit.

Second, what if a building is partially destroyed by fire, but a local ordinance requires its demolition. Is the insurer responsible for the policy limits? If the valued policy state recognizes constructive total losses, the insurer would owe the policy limits. Of the 19 "pure" valued policy states, only in Georgia, Montana, South Carolina, and South Dakota, could no case law be found. All other states consider constructive total losses as total losses for purposes of the valued policy law.

In conclusion, when faced with a loss in a valued policy state, consult the valued policy statute itself (and any related statutes). If your issue is either not clear or not addressed in the statutes, then case law, insurance commissioner opinions, or administrative codes may address the issue.