FAIR or Unfair?


By: Zachariah E. Moura
California FAIR Plan Association v. Garnes (May 26, 2017) __ Cal.App.5th __ [218 Cal.Rptr.3d 246]

Hewing to the rule that “where an insurer’s policy contains terms that conflict with the law, the courts will decline to enforce the impermissible terms and read into the policy the terms required by statute,”[1] the Court of Appeal, First District, held in California FAIR Plan Association v. Garnes that Ins. Code § 2051, coupled with sections 2070 and 2071, sets a minimum standard of coverage that requires an insurer to indemnify its insured for the actual cost of the insured structure, minus depreciation, even if this amount exceeds the fair market value of the structure, where an open fire insurance policy pays “actual cash value,” and there has been a “partial” but not “total loss to the structure.”

The California FAIR Plan Association (“FAIR”) is an insurance industry placement facility and joint reinsurance association created by the California Legislature in 1968 to provide basic property insurance to homeowners who live in high risk or otherwise uninsurable areas. Marlene Garnes, residing in just such an area of Richmond — the “Iron Triangle” (named for the intersecting railroad tracks that frame it) — insured her family home through FAIR, with a policy limit of $425,000.

After her home was damaged (but not destroyed) by fire, Garnes submitted a claim to FAIR seeking indemnity for the costs required to repair her home, less depreciation, the net amount of which was $320,549. FAIR declined and instead paid her the $75,000 it determined represented the fair market value of her property in 2011, and filed a declaratory relief action against her regarding the interpretation of Ins. Code § 2051.

After the trial court granted summary judgment in favor of FAIR, the court of appeal reversed.

The FAIR Policy stated that if the cost to replace or repair a damaged dwelling exceeded its actual cash value, which the Policy defined as “Total Loss,” FAIR would pay the actual cash value, but in any other case, which the Policy described as “Partial Loss,” FAIR would pay the lesser of the cost to repair less reasonable depreciation or the actual cash value.

The court held that Ins. Code § 2051 provides mandatory minimum coverage under an open ACV fire insurance policy. Section 2051 provides that in the case of a “total loss to the structure,” recovery is limited to the lesser of the policy limit or a property’s “fair market value.” (§ 2051, subd. (b)(1).) However, where the loss is a “partial loss to the structure,” recovery is not limited to fair market value but instead is the lesser of the policy limit or “the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its conditions at the time of the injury.” (Ibid.)

Because Ins. Code § 2070 requires “[a]ll fire policies” to be on the standard form or provide coverage for fire losses that is “substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy,” the court held that the FAIR Policy was unenforceable to the extent that it purports to cap indemnity for partial losses at fair market value, or to treat a loss that did not destroy the structure as a “total loss.”

The decision may prod a lobbying effort to encourage the Legislature to amend section 2051 by inserting “fair market value” as a cap on recovery. Until then, given the dramatic difference in value to an impoverished homeowner when a fire-damaged home is deemed a “partial loss” rather than a “total loss”, it appears that there will be many factual disputes over what degree of damage qualifies as “total loss to a structure.”

 [1]  California FAIR Plan Association v. Garnes (May 26, 2017) __ Cal.App.5th __ [218 Cal.Rptr.3d 246], citing Howell v. State Farm Fire & Casualty Co. (1990) 218 Cal.App.3d 1446; Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747, 754; and Wildman v. Government Emp. Ins. Co. (1957) 48 Cal.2d 31, 39–40.

For any questions, please contact Zach Moura at