Summary of a Recent
Judicial
Development in
Crop Insurance
Insurance Policy Application
Ruled Not Part of Policy
Brandy L. BrownNational AgLaw Center Graduate Fellow
The United States District Court for the Western District of Arkansas has granted an insurer's motion for summary judgment and denied the insureds' motion for summary judgment in an action brought by the insureds seeking recovery for losses they suffered when one of their poultry houses was destroyed by fire. Forrest v. Northland Cas. Co., 213 F.Supp.2d 1023, 1023-24 (W.D. Ark. 2002). The court ruled that the plaintiffs' insurance policy application, including all of the property valuations contained in that application, did not become a part of the insurance policy, and therefore the Arkansas valued policy law, Ark. Code Ann. § 23-88-101, did not apply. Id. at 1024-25.
On June 1, 2001, the plaintiffs purchased an insurance policy from the defendant covering three poultry houses and certain equipment. See id. at 1024. The application that the plaintiffs submitted for the policy contained the separate values of each of the plaintiffs' poultry houses and equipment. See id. The policy that was issued, however, did not include these individual property valuations but only established an overall policy limit of $370,000.00 for "'blanket buildings and equipment.'" See id. (quoting Doc. 12 Ex. C "Commercial Property Coverage Part Declarations").
The policy contained a provision providing that "the replacement cost for any loss of damage is not recoverable unless the property is actually repaired or replaced as soon as reasonably possible after the loss or damage." Id. The policy also provided that "[i]f this is not done, then only the actual cash value, which takes depreciation into account, is recoverable." Id.
On July 1, 2001, one of the plaintiffs' poultry houses was completely destroyed by fire. See id. The plaintiffs filed a loss claim with the insured pursuant to the terms of their insurance policy. See id. The plaintiffs calculated their loss amount by first "determining the replacement cost of the poultry house and its equipment at the time of the loss, which it estimated to be $171,000," and then deducting a depreciation amount because they had not rebuilt the poultry house. Id. The actual cash value of the poultry house was later determined to be $97,256.00. See id. The insurer "added $7,000 for debris removal, which was also covered under the policy, subtracted the $1,000 deductible, and made a total payment of $103,256 to the Plaintiffs." Id.
The plaintiffs brought an action against the insurer contending that they were entitled to an additional $58,744.00 because the insurance policy application they submitted listed the destroyed poultry house as having a value of $162,000.00. See id. The plaintiffs argued that their policy application should become part of the policy and that "under Arkansas' valued policy law, they are entitled to the full $162,000.00 because the poultry house was totally destroyed." Id.
The court stated that "[a] 'valued policy' is one where the value of the insured property is agreed to by the parties in the contract in advance." Id. (citing St. Paul Fire & Marine Ins. Co. v. Griffin Constr. Co., 993 S.W.2d 485, 487 (Ark. 1999)). The court explained that "Arkansas' valued policy law requires insurers to pay the full amount stated in the policy or the full amount for which the company collects premiums in cases 'of a total loss by fire or natural disaster of the property insured.'" Id. (quoting Ark.Code Ann. § 23-88-101). The court also explained that Arkansas' valued policy law "is intended to relieve the insured of the burden of having to prove the value of the property after its total destruction and to prevent insurance companies from receiving premiums on overvaluations and then applying policy limitations concerning valuation when the property is destroyed." Id. (citing Underwriters at Lloyd's v. Pike, 812 F.Supp. 146, 148 (1993)).
The plaintiffs also asserted that Ark. Code Ann. § 23-79-118(a) required that the policy application become part of the insurance policy, thereby making the $162,000.00 the amount agreed to by the parties. See id. at 1024-25. Section 23-79-118(a) provides that "an insurance contract is to be construed 'according to the entirety of its terms and conditions as set forth in the policy and as amplified, extended, or modified by any rider, endorsement, or application made a part of the policy.'" Id. at 1025 (quoting § 23-79-118(a) (emphasis supplied)).
The court rejected the plaintiffs' argument, ruling that the plaintiffs' application did not become a part of the policy, and, therefore, Arkansas' valued policy law was not applicable. See id. The court stated that "the application is not attached to the policy, nor is there any language in the policy incorporating the application. Accordingly, the application is not 'a part of' the policy and there is no agreed-to value for the destroyed property." Id. (citing American Pioneer Life Insurance Co. v. Allender, 713 S.W.2d 249, 251 (1986) (emphasis supplied)).
The plaintiffs argued in the alternative that "even if the application is not part of the insurance contract and there is no agreed-to value in the contract, Defendant should be 'estopped as a matter of law from ascertaining any value of the building other than' the $162,000 figure reflected in the application since the application was completed only a month prior to the fire and the parties agreed on that value then." Id.
The court rejected this argument, stating that "the policy states that only the actual cash value, not the replacement value which the $162,000 figure represents is payable if the insured property is not rebuilt." Id. The court stated that "[u]nder the terms of the policy . . . Plaintiffs were not entitled to the replacement cost because they did not rebuild. The policy specifically states that in such circumstances, only the actual cash value, which takes depreciation into account, is payable. The court also stated that the plaintiffs' belief that they would receive the $162,000.00 amount contained in the application "is contrary to the plain language of the policy." Id. at 1025-26 (citing Elam v. First Unum Life Ins. Co., 57 S.W.3d 165, 169 (2001) (ruling that if a policy's language is not ambiguous, then a court is required to give plain effect to the policy's plain language)).
The court noted that there was no evidence presented that warranted a reformation of the parties' policy. See id. The court stated that "[a] contract may be reformed to comport with a party's understanding of it only if there was a mistake on that party's part accompanied by fraud or other inequitable conduct of the other party." Id. at 1026 (citing Mikus v. Mikus, 981 S.W.2d 535, 538-39 (Ark. Ct. App. 1998)).
The case was decided on August 21, 2002; this summary was prepared in October, 2002.