Insurance policies provide different levels of insurance coverage and even if the amount purchased was adequate at one time, developments over time (e.g., inflation, upgrades, regulatory changes and surge pricing) may leave the policyholder underinsured. In this post in the Blog’s Wildfire Insurance Coverage Series, we emphasize the need for policyholders to take a close look at the policy’s terms to select the right type and amount of coverage for a potential loss.

Various types of coverage are available and there has been extensive litigation concerning the amount of coverage provided by one policy form or another. For example, the policyholder may have purchased market value coverage (the value of the house at the time of the wildfire), replacement coverage subject to a policy limits cap, guaranteed replacement cost coverage, or some variation on the theme. While the property may be properly valued when the insurance is purchased, it may become undervalued at the time of loss due to factors like inflation or home improvements that were not disclosed to the insurer. And, however generous the limits may be when the policy is procured, as one court discussed, it may be insufficient when “surge pricing” occurs after a wildfire.[1]

These concepts were discussed in considerable detail in Vulk v. State Farm General Ins. Co. (Boles Wildfire) where the policyholder purchased a policy providing replacement coverage subject to a policy limit that supposedly reflected the estimated cost to rebuild the home.[2] After the wildfire destroyed the home, it was rebuilt at a materially greater cost. In rejecting the policyholder’s argument for complete reimbursement, the court held that it was the policyholder’s obligation to select the coverage it wanted (in this case, guaranteed replacement value), that under the circumstances presented, the agent had no special obligation to recommend alternatives, and that recognized exceptions to this rule were not present.

In another case, the policyholder purchased replacement cost coverage (value of lost or damaged building) as well as extended replacement cost coverage (cost to repair or replace) for their home.[3] After the home was destroyed by a Northern California wildfire, the policyholder undertook plans to rebuild but because of obstacles in the rebuilding process such as the overwhelming demand for architects, contractors and others that bogged down the permitting process, the demand surge that dramatically increased pricing (factors which the insured characterized as “factually and legally impractical and/or impossible” to overcome), and questions concerning whether the insurer would pay the extended replacement cost, the policyholder sold the property at a loss. The insurer agreed to pay the value of the damaged building but declined to pay for the cost of replacement because the policyholder did not satisfy the condition precedent—replacement of the property. The court accepted the insurer’s position, reasoning that the policy language controlled and that there was no evidence of anticipatory breach.

Policies also may contain sublimits that can affect the scope of recovery. For example, SECURA Ins. v. Lyme St. Croix Forest Co. addressed whether a wildfire (the Germann Road Fire) that expanded and refueled over the course of several days and 7,442 acres constituted a single uninterrupted cause of all damages, and thus one occurrence subject to the policy’s per occurrence limit of $500,000, or multiple occurrences each time the fire spread to new property permitting collection of sublimits for each occurrence up to the policy aggregate of $2 million.[4] The Court of Appeal held that each of the events that occurred over the course of several days and over an extended geographic area could constitute a break in causation under the “cause” theory adopted by Wisconsin courts and provide for multiple occurrences. However, on appeal to the Wisconsin Supreme Court, the Court ultimately held that the fire constituted a single event and thus, the $500,000 per occurrence limit was applicable.[5]

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This is the fifth post in the Blog’s Wildfire Insurance Coverage Series.

*This post is an excerpt from an article written by Scott DeVries and Yosef Itkin that originally appeared in the Journal on Emerging Issues in Litigation published by Fastcase Full Court Press, Volume 2, Number 3 (Summer 2022), pp. 213-222 (a comprehensive list of all references is provided in the published journal version). 

[1] The contract terms will govern so long as the coverage terms meet or exceed those specified by statute.  See e.g., St. Cyr v. California FAIR Plan, 223 Cal.App.4th 786 (2014) and California FAIR Plan v. Games, 11 Cal.App.5th 1276, 1295 (2017). 

[2] 69 Cal.App.5th 243 (2021).

[3] Tarakanov v. Lexington Ins. Co., 441 F.Supp.3d 887 (N.D. Cal. 2020).

[4] 378 Wis. 2d 740, rev’d and remanded, 384 Wis.2d 282  (2018).

[5] SECURA Ins. v. Lyme St. Croix Forest Co., LLC, 384 Wis.2d 282, 299.