13.6 Payment of Loss

• Library: Insurance Law in Virginia (Virginia CLE) (2020 Ed.)

13.6 PAYMENT OF LOSS

13.601 Timing of Payment. Section 38.2-2105(A) of the Virginia Code provides that

[e]xcept as provided in [section] 38.2-2107, each policy shall contain the following provisions, conditions, stipulations , and agreements:

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When loss payable. The amount of loss for which this Company may be liable shall be payable sixty days after proof of loss, as herein provided, is received by this Company and ascertainment of the loss is made either by agreement between the insured and this Company expressed in writing or by the filing with this Company of an award as herein provided. ³¹⁴

13.602 Rules. One of the standards in the Rules Governing Unfair Claim Settlement Practices, which if willfully violated or violated "with such frequency as to indicate a general business practice" ³¹⁵ relates to payments of loss.

14 VAC 5-400-70(D) provides that

[i]n any case where there is no dispute as to coverage or liability, an insurer shall offer to a first party claimant an amount that is fair and reasonable as shown by the investigation of the claim, provided the amount so offered is within policy limits and in accordance with policy provisions.

13.603 Actual Cash Value.

A. In General. Section 38.2-2104(A) of the Virginia Code requires that fire insurance policies contain an insuring agreement that,

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among other things, provides coverage to the insured not exceeding the policy limits and

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 such 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. ³¹⁶

B. Broad Evidence Rule. The phrase "actual cash value" is not defined in the insurance policies. In Harper v. Penn Mutual Fire Insurance Co., ³¹⁷ the court identified three tests that have been used to determine actual cash value: (i) replacement cost less depreciation; (ii) market value; and (iii) the broad evidence rule. The broad evidence rule "permits the introduction and consideration of any evidence logically tending to the formation of a correct estimate of the value of the destroyed or damaged property for the purpose of ascertaining the 'actual cash value' at the time of loss." ³¹⁸ In the absence of a controlling Virginia decision, the court adopted the broad evidence rule.

The court stated that strict adherence to either of the recognized tests of "market value" or "reproduction cost less depreciation" will merely serve to shackle the trier of fact in all cases. The difficulty with the "actual market value" test is that a hypothetical sale would have to be established as instances of sales of buildings, independently of the land upon which they stand, are scarcely ever the subject of market sales. To adopt the "reproduction or replacement cost, less depreciation" theory may well result in an inflated value, particularly where the specialized use of

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the property has been abandoned or otherwise modified. ³¹⁹

Depending on the circumstances, the broad evidence rule should permit evidence of cost, age, condition, use, size, quality, materials, workmanship, location, market value, replacement cost, repair cost, and depreciation.

C. Repair Cost Limitation. Often, the cost of repairing the damage caused by a fire is less than the actual cash value of the insured property at the time of loss. In such cases, the policy language required by section 38.2-2104(A) limits the insurer's liability to the "cost to repair or replace the property with material of like kind and quality within a reasonable time after such loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair." ³²⁰

In Weinstein v. Commerce Insurance Co., ³²¹ the cost of repairing a fire-damaged apartment building was $8,745.24, and the value of the building before the fire equaled or exceeded $26,800, the limit of the insurance policies covering the building. The policies insured the building to the extent of the actual cash value 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." ³²² The insured contended that her loss was total and that she was entitled to $26,800, because the applicable zoning ordinances would not permit her to repair the building for use as apartments. However, the Virginia Supreme Court concluded that the policies were "plain and free from difficult interpretation" ³²³ and held that the insured's recovery was limited to the cost of repairing the building.

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13.604 Replacement Cost.

A. Statutory Options. Section 38.2-2119(A) of the Virginia Code provides that the SCC may approve and authorize the use of forms or provisions in insurance policies that indemnify insureds for the following:

(i) the difference between the actual cash value of the property at the time of loss and the cost of repair or replacement of the property on the same site with new materials of like kind and quality, within a reasonable time after the loss, and without deduction for depreciation, (ii) additional cost or loss by reason of any ordinance or law in force at the time of loss which necessitates the demolition of any portion of the insured property, (iii) any increased cost of repair or replacement by reason of any ordinance or law regulating construction or repair of the insured building, and (iv) loss from interruption of business, untenantability, or termination of leasehold interest because of damage to or destruction of the property described in the policy.

These forms or provisions "shall apply to coverage provided to an insured having any interest in an insured building or structure which is a part of the building described in the policy, including service equipment for the building." ³²⁴ Section 38.2-2119(C) provides that

insurers may offer, as an option, coverage limited to the amount necessary to repair or replace damaged property with functionally equivalent property at a lower cost than would be required to repair or replace the damaged property with material of like kind and quality. Such policies may also permit, at the option of the insured, settlement based on the market value of the damaged property at the time of loss.

No new policy of insurance covering property insured on a functional replacement cost basis may be issued or delivered in the Commonwealth unless it contains a notice, in the required form, that claims may be settled for less than the actual cash value of the property insured. ³²⁵

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There is no statutory provision governing replacement cost coverage for personal property. However, such coverage is commonplace.

B. Statutory Requirements. Insurers issuing new or renewal fire insurance policies must offer in writing, as an option, a provision that property will be repaired or replaced in accordance with applicable ordinances or laws that regulate construction, repair, or demolition. ³²⁶

Insurers writing insurance on owner-occupied dwellings and appurtenant structures with a replacement cost provision must provide on each new and renewal policy a statement summarizing any minimum coverage requirement necessary for the replacement cost provision to be fully effective and the effect on claim payment of not meeting the minimum coverage requirement. ³²⁷

C. Time for Replacement Cost Claim. Many fire insurance policies contain replacement cost provisions that limit payment to actual cash value until the actual repair or replacement is complete and that require the insured to make claim for repair or replacement cost within 180 days after the loss.

Whitmer v. Graphic Arts Mutual Insurance Co. ³²⁸ involved a homeowners policy that contained those provisions. The insured's home and contents were destroyed by fire but were not repaired or replaced. At trial, the insurer relied on arson by the insured as a defense. The question of law certified by the United States Court of Appeals for the Fourth Circuit was the following: Is the measure of damage in this case the replacement cost of the dwelling and personal property lost in the fire or is it the actual cash value thereof?

The Virginia Supreme Court answered the first part of the question in the negative and the second part in the affirmative. The court rejected the insured's argument that the insurer's "actual replacement" and "180 day" conditions were in conflict with the standard policy form mandated by section 38.2-2105 of the Virginia Code. The court explained that section 38.2-2119 specifically allows replacement cost coverage and "implies that the property will be replaced given its requirement that the insurance company provide a

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reasonable time after the loss for property replacement." ³²⁹ The court also rejected the insured's argument that the insurer's policy conflicted with the standard policy form, because it added a third minimum payment period for 30 days after a final judgment. The court explained that "the standard policy form does not cover those instances in which litigation is necessary because an insured is alleged to have violated a term of the policy, as in this case, thereby forfeiting his right to coverage." ³³⁰

The insured further argued that, for two reasons, the insurer lost its right to require him to replace the property by contesting liability for any payment on the ground of alleged arson. First, the insurer's claim of arson prevented him from replacing the property, because replacement was dependent on the insurer's payment of the actual cash value of the property. Second, the insurer could...