When it Comes to Getting RCV—Time is Money: “Beware” of those ACV Payments

presented by:Henri Tartt, Esq., MBA, ARM

Law Offices of Henri Tartt3325 Wilshire Blvd., Suite 749

Los Angeles, CA 90010Tel: (310) 683-9245

htartt@tarttlaw.comwww.tarttlaw.com

NAPIA/CAPIA Insurance SeminarMarch 21, 2012

Marina del Rey, California

OVERVIEW

• ACV Payment—and its effect on receiving RCV

• Effects of Appraisal on ACV and receiving RCV

• The Ramifications of Policy Warranties

www.tarttlaw.com

ACV PAYMENT’S EFFECT ON

RECEIVING RCV

Measuring ACV—Contents

• Contents: Cal. Ins. Code § 2051(b)(1)• Total Loss or Partial Loss:– Same calculation used– Cost to repair/replace/rebuild – depreciation– Or the policy limit—whichever is less– re: “open policies”: value of item/thing not agreed upon

& to be decided• Timing: cost to replace damaged/destroyed item on

day of loss (e.g., fire on July 22, 2010 compute value using that date—not today)

Measuring ACV: PARTIAL LOSS – STRUCTURE

• Structure: Dwelling, Building, Shed, etc.– Partial Loss– Cost to repair/replace/rebuild – depreciation – Just like contents– Cal. Ins. Code § 2051(b)(2)

• Timing: cost to replace damaged/destroyed Structure on date of loss—not today)

Measuring ACV: No Depreciation

• Re: Partial Losses to Structure only• Things Not Normally Replaced, then:• No Depreciation Taken for such (arguably):– Doors & door knobs– Mirrors– WIndows– Cal. Ins. Code § 2051(b)(2)

Measurement of ACV: StructureTOTAL LOSS

• Structure: Dwelling, Building, Shed, etc.• Total Loss:– FMV (Fair Market Value): Cal. Ins. Code § 2051(b)(1)– Jefferson Ins. Co. v. Sup. Ct. (May) (1970) 3 Cal.3d 398– What a buyer would have paid on loss date – “Comparables” in the neighborhood – Land not included (FYI: doesn’t burn)

• Timing: cost to replace damaged/destroyed Structure on date of loss—not today)

Consequences of ACV Payments:Structure

• “Two Tier” Policies that pay:– ACV first & then RCV (i.e., withheld depreciation amount)– Once insured repairs/rebuild/replaces structure

• Issue: Policies with 180 day rebuild/replace clause:

– “You can make claim for withheld depreciation within 180 days of the ACV payment [so as to get to full RCV]

– “We will pay to reimburse you the cost in excess of ACV if you repair/replace/rebuild structure within 180 days of the ACV payment (or from the first ACV payment) [so as to get to full RCV]

Consequences of ACV Payments:Structure—Scenarios

• Possible scenario: so Beware of the ACV Payment!• If the policy says “Rebuild w/i 180 days after the ACV

payment”, and THE ACV, is paid it starts 180 day clock:– Rebuild/replace—within 180 days of “the ACV payment”– If fail, miss out on RCV—hundreds of thousands/no house– Angry insured = malpractice! “Why didn’t you warn me!?”

• Arguably: “the ACV” payment means the entire ACV payment—and not “the first”

• Arguably: “the ACV payment” takes agreement by both sides—and not a unilateral self-serving insurance company decision

Consequences of ACV Payments:Structure—Missing Out on RCV

• Missed Out on RCV scenario– Delayed rebuilding after first ACV payment– Later reach agreement with insurer for the entire ACV

• Insurer asks copy of rebuild contract:– “180 days the ACV payment” language in policy – Completion date longer than 180 day deadline

• Then, no RCV/Recapture of depreciation– Unless, you buy a house at different address/location – Fraley v. Allstate Ins. Co. (2000) 81 Cal.App.4th 1282

Consequences of ACV Payments:Structure—Insurer RCV Restriction

• Per Ins. Code 2051.5(b)(1): After first payment of ACV, to get full RCV:– Can’t force rebuild in < 12 months from first ACV pay– If you see policy says: “180 days from first ACV”—then VOID– Extensions of 6 months for Good Cause

• Losses re: State of Emergency: minimum 24 mos.

• No RCV scenario: first ACV policy & 1st paid June 1, 2010– Insurer wants contract August 2011: finish date Feb 2012– If no good cause exists—then don’t get RCV

Consequences of ACV Payments:Structure—Reality

• It’s Nice to get ACV money—but then what?

• Can you rebuild a house in 180 days?– City building dept. permit process;– Actual construction time;– Probably not, but SO WHAT—start building using ACV immediately!– Remember: Only like-kind & quality: (major haggling source)

• Sad Reality of Insurance – just receiving ACV is not enough to fully/partially rebuild the house! – Can the insured get a loan?– Try to “get paid as you build.” Myers v. Allstate Ins. Co. (C.D. Cal. 1997) 989

F.Supp. 1250, 1254 citing Maryland Casualty Co. v. Knight (9th Cir. 1996) 96 F.3d 1284, 1293.

Consequences of ACV Payments:Contents

• Contents– Recapture limited to items actually paid on

– Clarify which items the ACV payment is for

– “The first” or “the ACV payment” policy applies

– No good cause extensions (e.g., 6 mo.) to replace

Henri Tartt, Esq., MBA, ARMwww.tarttlaw.com

THE ROLE OF APPRAISAL IN ACV

&GETTING RCV

Role of Appraisal in ACV & RCV

• Appraisals for:– Contents– Structure

• Disputes regarding only:– Value of items– Amount of loss

• No coverage matters– No causation

Role of Appraisal in ACV & RCV• Mandatory or Not?

– Either side can make written request. Ins. Code 2071(a)– “If accepted language”—makes it appear optional– Appraisals treated like an arbitration as a matter of law. Mahnke v.

Sup.Ct. (2009) 180 Cal.App.4th 565, 573 – If refused, court must order arbitration/appraisal where an

agreement exists. Kirkwood v. CSAA (2011) 193 Cal.App.4th 49, 57-58; CCP 1281.2• So can be compelled by either party—unless government-declared

disaster involved. Cal. Ins. Code 2071• Mandatory if requested: Doan v. State Farm (2011) 195 Cal.App.4th 1082,

1092 fn.6• Must be a controversy—dispute about the value or amount of loss

Consequences of Appraisal:Considerations

• Appraisal Demand Premature?– Coverage issues undecided—that facilitate the appraisal?– Dec Relief: insurer motion to compel denied can wait, as

wrong ACV formula: consider age & condition of items• Kirkwood v. CSAA (2011) 193 Cal.App.4th 49

– Stay appraisal to sue re: software overstated depreciation• Doan v. State Farm (2011) 195 Cal.App.4th 1082

• Issues/Problems:– Short-change insured given defects in metrics/ACV formula – Coverage issues make appraisal unnecessary? Warranties?– Who’s going to pay for it?

Consequences of Appraisal

• Consequences:

– Appraisal can fix the ACV amount

– Appraisal can fix the RCV amount

– Without more, viewed as “the ACV” & RCV payout

Consequences of Appraisal:Problem for PAs

• Problems:– You demand & conduct appraisal on dwelling– Payment of the ACV, starts the clock to:

• Rebuild/replace—w/i 180 days of “the ACV payment”• Insured hasn’t started rebuilding—yet values fixed! • Insurer wants to see construction contract: Fraley v. Allstate

– If policy says rebuild after the first payment of ACV, have 12 mo. + extensions for good cause of 6 mo.• Delays from arguing with insurer not “good cause”; • Neither: delayed rebuild since ACV not enough

• Same for contents: but no good cause extensions

Appraisal: Problem-Solving• What if award comes out too low (& policy says “the

ACV payment”)?– Maybe buy more time to delay start of Rebuild Clock by

showing you disagree such being “the ACV” amount: – Application to Correct Award with panel (within 10 days) – Petition the court to vacate (CCP 1286.2) [frivolous

petitions = sanctions under CCP 128.7]• Fraud, corruption, biased umpire, prejudice from not postponing

– Petition the court to correct the award (CCP 1286.6)• Evident miscalculations and mistakes (if refused by panel, e.g.)

– Meanwhile: Don’t cash checks (trust account maybe OK)

Other Considerations: Appraisal

• Appraisal can be adverse in other ways: • Effectually pardons prior Bad Faith– Lowers damages, so less appealing for lawyers: only ALE?

• Lowers punitive damages: max is 9x compensatory• Ill-advised appraisal could constitute malpractice– Angry they missed out on a house (at same location)– May talk to a lawyer later & learn about viable bad faith

claims that were never pursued

Henri Tartt, Esq., MBA, ARMwww.tarttlaw.com

RAMIFICATIONS OF

POLICY WARRANTIES

Policy Warranties

• How to Spot a Warranty– Policy says: Do this/that or Don’t do this/that

• Typically in Commercial Policies– Keep your sprinkler system functional – Security guard 24/7– Store flammable liquids in NFPA approved cabinets

& containers– Dispose of rags daily

• Notify us of any lapse of such deeds/protection

Policy Warranties

• Condition to coverage (also can be an exclusion)• Strictly construed– Trishan Air, Inc. v. Federal Ins. Co. (9th Cir. 2011) 635 F.3d

422, 429 citing Hogins v. Supreme Council of Champions of the Red Cross (1888) 76 Cal. 109, 112.

• No causal link to the loss-causing peril– National Union Fire Ins. Co. of Pittsburg v. Miller (1987)

192 Cal.App.3d 866, 868. Accord, Trishan Air, Inc. v. Federal Ins. Co. (9th Cir. 2011) 635 F.3d 422, 429.

• If don’t do/have, then coverage denied

Policy Warranties

• Public Adjuster’s Role:– If you see a reservation of rights involving this,

don’t play around—get the file to a lawyer fast

– If their investigation finds that a warranty was not complied with, they can just deny coverage

– Avoid “denial inertia”: get file to lawyer to lower chance of denial: show insurer it will cost them!