Rebuilding at a Different Location: Your Rights Under California Law

STATE OF CALIFORNIA

DEPARTMENT OF INSURANCE

Legal Division, Office of the Commissioner

April 3, 2008

Re: Request for Legal Opinion of the General Counsel of the California Department of Insurance Regarding Application of California Insurance Code Section 2051.5(c)

Three questions were presented:

1. Does replacement cost insurance provide coverage if a homeowner decides to purchase an already built home at a new location?

2. If a homeowner has an extended or guaranteed replacement cost policy and rebuilds in a new location, is the homeowner entitled to the "extended" or "guaranteed" portion of the coverage?

3. If a homeowner purchases a home at a new location for less than the cost to rebuild at the original location, is the homeowner entitled to recover the full amount it would cost to rebuild at the original location?

I. Statutory Interpretation

The starting point of the analysis is the language of the statute. A statute must be read as a whole, its parts in the context of the entire statute.

Insurance Code Section 2051.5 addresses the measure of indemnity under a fire insurance policy. Subsection (a) defines replacement cost: "Under an open policy that requires payment of the replacement cost for a loss, the measure of indemnity is the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured, without deduction for physical depreciation, or the policy limit, whichever is less."

Subsection (c) addresses replacement cost where a homeowner chooses to replace at a new location: "In the event of a total loss of the insured structure, no policy issued or delivered in this state may contain a provision that limits or denies payment of the replacement cost in the event the insured decides to rebuild or replace the property at a location other than the insured premises. However, the measure of indemnity shall be based upon the replacement cost of the insured property and shall not be based upon the cost to repair, rebuild, or replace at a location other than the insured premises."

II. Discussion

Question 1: Does replacement cost insurance provide coverage if a homeowner decides to purchase an already built home at a new location?

Answer: Yes.

Section 2051.5 requires that replacement cost coverage allow a homeowner to "rebuild or replace" at a new location. The word "replace" means "to take the place of: serve as a substitute for or successor of." Nothing in the definition requires a homeowner to build from scratch. Purchasing an already built home "takes the place of" the destroyed home as much as constructing afresh.

The use of the separate words "rebuild" and "replace" establishes that a homeowner either can build a new home (rebuild) or purchase an already built home (replace) at the new location.

In Conway v. Farmers Home Mutual Insurance Co. (1994) 26 Cal.App.4th 1185, 1187, the court held that under a replacement cost policy "an insured homeowner may recover the replacement cost of fire damage to an insured home by purchasing another home at another location."

Question 2: If a homeowner has an extended or guaranteed replacement cost policy and rebuilds in a new location, is the homeowner entitled to the "extended" or "guaranteed" portion of the coverage?

Answer: Yes.

"Replacement cost" as used in Section 2051.5(c) is not limited to "replacement cost" in distinction from "extended" or "guaranteed" replacement cost. The purpose of that section is to ensure that a homeowner is not penalized for rebuilding or replacing a destroyed home at a new location. Thus, if a policy provides for extended or guaranteed replacement cost, the full scope of that coverage is available whether the homeowner rebuilds at an original or a new location.

Any other reading would deprive the homeowner of the benefit of his or her bargain with the insurer. A homeowner with an extended or guaranteed replacement cost policy paid premiums for the extended or guaranteed portion of coverage. Eliminating that portion if a homeowner chose to rebuild at a new location effectively would work a forfeiture and penalize the homeowner for exercising that right in violation of Section 2051.5(c).

Question 3: If a homeowner purchases a home at a new location for less than the cost to rebuild at the original location, is the homeowner entitled to recover the full amount it would cost to rebuild at the original location?

Answer: No.

Subsections (c) and (a) of Section 2051.5 must be read together. Subsection (a) establishes that amounts paid above actual cash value must cover amounts actually paid by the homeowner (and those amounts must be reasonable). Section 2051.5 does not authorize the homeowner to recover cash unrelated to the actual cost of building. Whether replacing at an original or a new location, the homeowner may not recover amounts above actual cash value not actually and reasonably spent to rebuild.

Very truly yours,

Adam M. Cole

General Counsel