In California, Can an Insured Homeowner Recover Full Replacement Cost by Purchasing a Home at Another Location?

The short answer is yes. In Conway v. Farmers Home Mutual Insurance Company, the California Court of Appeal followed several out-of-state authorities in considering the issue and ruling in favor for the insured.¹ Chip Merlin raised this issue with respect to Texas back in 2009 – finding that the courts there apply the law a bit differently. You can revisit the blog here: Obtaining Full Replacement Cost Benefits Through Replacement at a Different Location – Texas Style.

In Conway, the plaintiffs purchased a house in Imperial Beach, California, paying $230,000 for the home and subsequently renting it out to tenants. They also obtained $100,000 in fire insurance on the property from Farmers Home Mutual Insurance Company (Farmers). The home was damaged by fire and although it could have been replaced, the Plaintiffs decided not to make any repairs because they believed it made more economic sense to develop the subject parcel in conjunction with development of an adjacent parcel they owned. So instead of repairing the damage within months of the fire, they paid $230,000 for another single-family home in Imperial Beach. After disagreements as to the value the insureds were entitled to, Farmer’s paid the actual cash value and refused to pay the replacement value of the loss.

The policy Farmers issued to Plaintiffs was pretty straightforward, promising that in the event of a fire at the insured premises, Farmers would pay for: “c. Buildings under Coverage A or B at replacement cost without deduction for depreciation…”² Plaintiffs argued that the policy placed no restriction on where an insured may replace a damaged building.

Conway was a case of first impression in California, however the appellate court considered the other states that found replacement costs can include purchase of another building at a different location, namely Connecticut, Alabama, Michigan, New Jersey, New York, Maine, and Washington.³

The court noted in particular, that in the case of Hess v. North Pacific Insurance Company out of Washington, the policy there had standard limitations on the recovery of replacement costs identical to the ones in the Farmer’s policy in Conway. Quoting Hess the court noted,

[T]he insured desires to rebuild either a different structure or on different premises. In those instances, the company’s liability is not to exceed what it would have cost to repair an identical structure to the one lost on the same premises. Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds.⁴

In rejecting Farmer’s arguments and analyzing the definition of “replace,” the court held,

The dictionary definition does not draw any distinction between what can be repaired and what cannot be repaired. More importantly, although the term replace certainly includes rebuilding on the same premises, the term also includes the notion of substituting for an original item another item which serves the same function as the original but is different in nature from the original. The broader and widely accepted meaning would certainly encompass the purchase of another house at a different location. Thus at best, Farmers can only contend there is an ambiguity in the policy with respect to the limitations on replacement of a damaged home…Because the ordinary and popular use of ‘replace’ includes the purchase of a replacement dwelling at another location and no other provision of the policy alerts the insured to a narrower limitation on payment of replacement costs, Farmers’ argument brings us to the rule which requires that ambiguities are to be resolved in favor of the insured.⁵

Therefore, it is important to carefully review all fire insurance policies for any limitations with respect to replacement costs. But absent such limitations, obtaining full replacement cost benefits by replacement at a different location is allowable under California law.
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¹ Conway v. Farmers Home Mutual Ins. Co., 26 Cal.App.4th 1185 (1994).
² Conway, at 1188.
³ (See, e.g., S and S Tobacco v. Greater New York Mut. 224 Conn. 313 (1992); Huggins v. Hanover Ins. Co. 423 So.2d 147, 150 (Ala.1982); Smith v. Michigan Basic Property Ins. Assn. 441 Mich. 181, (1992); Ruter v. Northwestern Fire & Marine 72 N.J.Super. 467, 471–473 (1962); Johnson v. Colonial Penn Ins. Co. (1985) 127 Misc.2d 749, 751–752, 487 N.Y.S.2d 285; Blanchette v. York Mut. Ins. Co. (Me.1983) 455 A.2d 426, 427–428; see also Hess v. North Pacific Ins. Co. (1993) 122 Wash.2d 180, 859 P.2d 586, 588).
⁴ Conway, 26 Cal.App.4th at 1190 (citing Hess, 859 P.2d at 587).
⁵ Conway, at 1191-92.