It’s Always a Good Idea to Read Your Insurance Policy

Among the basic rules of insurance are these two:  (a) always read your policy and (b) courts will construe clear and unambiguous insurance policy language by giving it its ordinary and plain meaning. This is the lesson that a policyholder learned after filing a claim for windstorm damage to his roof.  The question was whether the policy provided actual cash value or replacement cost damages.

In Richelson v. Liberty Insurance Corp., No. 19-3035 (6th Cir. Jan. 6, 2020) (Not Recommended for Full-Text Publication), the Sixth Circuit affirmed the district court’s grant of an insurance company’s motion to dismiss a policyholder’s breach of contract and fraud claims.  A windstorm caused damage to the policyholder’s roof and the policy filed a claim for replacement cost damage under his homeowner’s policy. The insurance company reimbursed the policyholder only for actual cash value, applying the policy’s deductible and deducting depreciation from the replacement cost amount.  A dispute arose and the policyholder sued for breach of contract and fraud and filed the case as a class action.  On the insurance company’s motion to dismiss, the district court granted the motion on the breach of contract claims and his fraud claim.  The Sixth Circuit affirmed the district court on appeal.

The policy had an endorsement, which as the court described it, in large and bold letters, said “actual cash value loss settlement or hail losses to roof surfacing.” The endorsement provided that if the loss is caused by windstorms, the claim will be settled at actual cash value at the time of the loss, but not more than the amount required to repair or replace.

The policyholder contended that the language in the policy declarations led him to justifiably believe that the endorsement expanded, rather than contracted, the extent of his coverage.  The policyholder also claimed that the language used was meant to mislead him and that he was fraudulently induced into entering into the insurance contract.

In affirming the dismissal, the court of appeals stated that the following principle resolved the case: “where an insurer has utilized contract language that is clear and unambiguous,” courts will construe that language by giving it its ordinary and plain meaning.  The endorsement’s language, said the court was subject to only one meaning and that was the meaning given to it by the insurance company.

The court rejected the policyholder’s arguments concerning the interplay between the policy declaration and the endorsement.  While the statement in the declaration said “Dwelling with Expanded Replacement Cost,” the endorsement directly addressed the damage to the roof and how the claim should be paid.  As the court recognized, the endorsement included an exception to the replacement-cost coverage for windstorm damage like that experienced by the policyholder and goes on to explain exactly how windstorm damage should be treated (actual cash value at the time of loss, but not more than the amount required to repair and replace).  Thus, the court found that the only reasonable interpretation is that the amount of the policyholder’s claim should be calculated by actual cash value, not the general rule of replacement cost.

The court rejected the policyholder’s attempt to invoke a so-called preferential interpretive rule that would give preference to the declarations and discount certain plain language in the endorsement. The court held that the policyholder’s interpretation of the endorsement was not reasonable.

The court also rejected other arguments, including that the deductible should not be included in the damages calculation and that the insurer committed fraud.  The latter argument was rejected solely on the policyholder’s failure to plausibly allege justifiable reliance. “The need to review the endorsement language was eminently clear to a reasonable reader.  That is enough to doom [the policyholder’s] fraud claim.”

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