Proving Covered Personal Property Loss Under a Homeowners Policy
| Publication year | 2022 |
| Pages | 30 |
TORT AND INSURANCE LAW
BY RONALD M. SANDGRUND
This article discusses common problems homeowners face when filing claims to access their insurance coverage for personal property loss following the catastrophic loss of a home by fire, flood, or otherwise.
On December 30, 2021, the Marshall Fire, fueled by steady 100 mile-per-hour straight-line winds, scorched Louisville, Superior, and unincorporated Boulder County, killed two people, and destroyed nearly 1,000 homes.[1] Among the many profoundly sad scenes following that conflagration was that of people picking through their homes' ash and rubble to create an inventory of their burned personal property. Capable of exceeding 5,000 degrees,[2] home fires often destroy personal property or render it unrecognizable. Most home insurance policies include automatic coverage for personal property (contents) loss with payment limits equal to some percentage of the overall dwelling limits.[3] In Colorado, when a home's contents are completely destroyed by fire, homeowner insurers are required to pay 30% of the personal property limits without any proof of the nature, condition, or value of the lost property.[4] With a little arm-twisting, the Colorado Division of Insurance persuaded many insurers to pay a much higher percentage to homeowners affected by the Marshall Fire.[5] But generally, to receive payment above that statutory minimum, homeowners must establish additional personal property loss per their policy's terms.
This article examines the typical insurance coverage applicable to the destruction of a home owner's personal property due to fire, flood, or some other catastrophic event. It discusses problems inherent in establishing a covered personal property loss and provides practical tips for addressing them. It also suggests steps to take to maximize coverage when buying homeowners insurance, including establishing the pre-loss existence, condition, and value of the property, and securing more expansive insurance protection.
Common Coverage and Proof Problems
Establishing personal property loss following the loss of a home is no easy task Homeowners generally must prove what personal property was present when the home was destroyed, the property's age and condition, the availability of "like kind and quality" replacement personal property, and the property's depreciated value and actual replacement cost. Moreover, most policies impose sub-limits that apply to particular kinds and classes of property, such as cash, silverware, valuable collections, and certain business property. Coverage limitations or exclusions also may apply to items with sentimental or unique value, such as wedding albums, family heirlooms, and antiques.
Creating a personal property inventory from memory, random family photos, electronically stored purchase records and credit card receipts, remnants found in the rubble, and so on can help complete a personal property inventory post-loss, but compiling such inventories is time-consuming and heart-rending, may be imprecise and incomplete, and could cause inadvertent duplications. These uncertainties can lead an insurer to contend that some of the claimed inventory is fraudulent and seek to void some or all of the policy's coverage.[6] Because such inventories may consist of thousands of line items, the risk of accidental duplication or error is almost unavoidable, so the risk of an insurer raising a fraud defense cannot be eliminated. Example 1 lists some common loss-adjustment strategies employed by insurers and "badges of fraud" they may flag.[7]
Policy Language
Several aspects of homeowners insurance policies are typically implicated in catastrophic personal property loss claims: (1) the policy declaration's monetary limits for the personal property (contents) coverage; (2) the policy's specified sub-limits and exclusions for certain kinds and classes of personal property; and (3) the policy's loss settlement and appraisal provisions. Example 2 contains some common provisions, but the exact policy language often varies considerably amongpolicies. (Discussion of third-party appraisal provisions, typically triggered when the policyholder and insurer disagree on the amount of the loss, is beyond this article's scope.)
Key Policy Terms
"Replacement cost" generally means the cost to replace personal property with new property of like kind and quality materials, goods, or products. "Actual cash value" or "ACV" typically means the replacement cost less depreciation. "Depreciation" usually refers to a property's loss of value due to age, wear, deterioration, use, or obsolescence. Depreciation should not be taken on a partial loss where the property can be repaired or restored.[8]
Actual Purchase Requirement Before Full Replacement Cost Reimbursement
The use of the term "replacement cost coverage" in many policies may be misleading because most policies require the insured to first replace the property as a condition precedent before the full replacement cost becomes payable. This means the insured must secure the necessary funds to buy the item and then seek reimbursement of the difference between the item's ACV and its replacement cost.[9] Courts have held that an insurer is not obligated to pay for claimed personal property loss where the insured's demand is based solely on the property's replacement cost and the item's actual replacement has not occurred—unless the policy provides true unconditional replacement cost coverage.[10] Replacement cost coverage is sometimes referred to as "newfor old," because it entitles the insured to replace old property with new property.[11]
Like Kind and Quality
Most policies require that an insured replace destroyed property with property of "like kind and quality." This does not equate to a precise duplicate of the destroyed property, just substantial similarity and use. Few cases have explained how to judge similarity of kind and quality when no comparable item can be found.[12] An insurer's insistence on an insured replacing destroyed property with identical property may be unreasonable if the policy only requires replacement with like kind and quality property. It is advisable to try to get an insurer to agree ahead of time how closely a new replacement item (such as a new Sony TV) must resemble the destroyed item (such as an older LG TV) both for ACV and replacement cost purposes. One frequently employed restriction—the "functional personal property valuation" limitation or endorsement—limits the insured's replacement cost recovery to the smallest of (1) the limit of insurance; (2) the cost to replace, on the same site, the lost or damaged personal property with the closest equivalent property available; or (3) the amount the insured actually spends to repair or replace the lost or damaged personal property.[13]
Goods No Longer Available
If the destroyed personal property is no longer made or available after the loss occurs, most policies allow its ACV or replacement cost to be calculated using property of like kind and quality.
Obsolete and Sentimental Goods
Challenges may arise when valuing obsolete goods and sentimental items.[14] Old computers, typewriters, and other aged electronic equipment that have become obsolete may be unwittingly assigned an inflated value. An insured may also overvalue items that have a family history or sentimental importance, such as heirlooms and hand made items handed down from prior generations, family photographs or picture albums, baby clothes, and wedding dresses. The insured may attach great emotional value to the item that does not match its actual value. Under a true unconditional replacement policy, however, the insurer may be obligated to pay what is necessary to replace the item with one of like kind and quality unless the policy provides otherwise, which some do for certain antiques and collectibles.
Electronic Data and Other Unique Personal Property
Electronic data may be difficult and expensive to duplicate. For example, recompiling financial records, digital photos, and the like may require exceptional efforts and may not even be possible. In many instances, no amount of effort or expense could recreate the lost data. Most policies exclude payment for recreating the data itself and limit recovery to the cost of the raw media storage product.
EXAMPLE 1. AN INSURER'S FRAUD-DETECTION CHECKLIST
When appropriate, conduct a detailed recorded interview of the insured regarding the inventory, and compare the inventory with photos and descriptions of the debris field taken soon after the loss.
Look for inconsistencies in the insured's explanation of who prepared the inventory, how it was prepared, and how supporting inventory documents were authenticated.
Ensure that the inventory is complete, including the quantity, description, condition, age, actual cash value, and replacement cost of the destroyed property.
Request documentation, such as tax, divorce, bankruptcy,* and other records, as well as digital photos and metadata, to rule out improper modifications, alterations, and valuations. Then, follow up with the claimed source of the documentation—such as retailers and online sellers—to verify items and identify any returns.
Under suspicious circumstances, examine an insured's finances to find out if the insured had the means to buy the claimed items, especially when considering the items' age.
'Insureds sometimes undervalue assets on a bankruptcy petition while inflating the value during an insurance claim. In Fidelity Nat. Ins. Co. v. Jamison-Means, 2008 WL 687383, at *5 (M.D.Ala. 2008), the insured stated in her bankruptcy schedule that her household goods' value about 30 days before the loss was $2,300, but her insurance proof of...
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