Homeowner insurance policies can be difficult to interpret when it comes time to make a claim for benefits. This 5th Circuit Court of Appeals opinion provides some insight into how the courts review and interpret insurance policies. The case is styled Claudia Ayoub; Gerald C. Ayoub v. Chubb Lloyds Insurance Company of Texas.
The principal question presented in this dispute over a homeowner’s insurance policy is whether a section of the policy setting forth a “reconstruction cost less depreciation” standard for dwelling loss is a coverage provision, on which the insured has the burden of proof, or a limitation of liability provision, on which the insurer has the burden. The court also had to decide how insureds can prove market value under Texas law for personal items which may have no such thing. For the reasons discussed below, the court found that summary judgment in favor of the insurer was not warranted on either issue.
The Ayoubs’ own a home in El Paso. Prior to the loss in this case, it was worth in the neighborhood of $2 million. The home was insured under a “Texas Standard Homeowners Policy” issued by Chubb. Coverage A of the Policy insured the dwelling for up to $2,511,000. Coverage B insured personal property in the home for up to $1,506,600. At additional cost, the Ayoubs purchased replacement cost endorsements for both their dwelling and personal property.
The Ayoubs’ home was damaged when pipes burst during a severe cold front. The Ayoubs notified Chubb, which began investigating the claim and made payments totaling close to $1 million for repairs to the dwelling and losses to personal property. A disagreement arose between Chubb and the Ayoubs regarding the full extent of the Ayoubs’ covered loss. The Ayoubs sued Chubb in Texas state court to force additional payment under the Policy. In addition to their contract claims, the Ayoubs asserted statutory claims for unfair claim settlement practices.
The first issue is whether the Ayoubs or Chubb bore the burden of proving depreciation to the dwelling. The court then cited the relevant policy provisions.
Under Texas law, an insured suing for breach of an insurance agreement bears the initial burden of proving that his loss results from a covered risk. But if the insurance policy contains exclusions to coverage, it is the insurer’s burden to prove the exclusion applies.
Similar rules govern an insured’s damages. The insured has the burden of proving the extent of his loss. And if the insurance policy defines how loss will be measured, the insured is “relegated” to that measure. But a contractual limitation of liability–that is, a cap on what the insurer will have to pay out, independent of the value of the loss–falls upon the insurer to plead and prove.
Underlying these rules is recognition that the value of a loss can be expressed a number of different ways. As relevant here, two possible measurements are market value and repair or replacement cost. Which particular measurement most faithfully compensates the insured for his actual loss–no more and no less–can be a “controversial question.” A contractual measure of damages is one way of settling the controversy in advance. A limitation of liability can serve the same function, by indicating that the insurer will pay only the smallest of a number of different possible measurements.
This is not to say that the absence of a contractual measure of damages gives the insured absolute freedom to decide how to measure his loss. Texas law provides some default rules. In the case of a “partial loss under an insurance contract insuring a dwelling”–the loss at issue in this case–the “ordinary measure of damages . . . is the difference between the value of the property immediately before and immediately after the loss, but within the amount of the policy.”
This court then went on to discuss why Chubb’s interpretation of the policy language was not proper.
This case also discusses other policy language and how it should apply to the facts of the case. The opinion is worth reading for any one having a homeowners claim.
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