“Actual Cash Value” of Unreplaced Property Includes Sales Tax

Holden v. Farmers Insurance Co. (Wash. Supreme Court, September 9, 2010)

Reversing a Court of Appeals decision, the Washington Supreme Court held that, under a provision for coverage of the “actual cash value” of damaged property, the insured was entitled to coverage for sales tax even though she had not actually replaced the property when she submitted her claim.

A fire in Laura Holden’s rented home damaged some of her personal property. Her renter’s insurance policy with Farmers provided coverage under the following provision: “Covered loss to property will be settled at actual cash value. Payments will not exceed the amount necessary to repair or replace the damaged property, or the limit of insurance applying to the property, whichever is less.” The policy defined “actual cash value” as “the fair market value of the property at the time of loss,” but did not define “fair market value” or specify how the value would be determined.

For additional premium, Ms. Holden had purchased an endorsement for “replacement cost” coverage, which provided for “the full cost of repair or replacement without deduction for depreciation” and defined “replacement cost” as “the cost, at the time of loss, of a new article identical to the one damaged, destroyed or stolen.”

Farmers paid Ms. Holden’s an amount it determined to be the fair market value of her property, which did not include sales tax. Ms. Holden requested that sales tax be included, even though she had not yet replaced the property. She later explained that she was unable to afford to pay for replacement items and wait for reimbursement from Farmers. Farmers refused additional payment, explaining that it would pay sales tax only if Ms. Holden submitted receipts for coverage under the replacement cost endorsement.

Ms. Holden brought a putative class action. The trial court granted summary judgment to Ms. Holden on interpretation of the insurance policy. The Court of Appeals granted discretionary review and reversed. But the Washington Supreme Court accepted review and reversed the Court of Appeals, reinstating the summary judgment in Ms. Holden’s favor.

In a 6-3 split decision, a majority of the Supreme Court ruled that the policy provision on actual cash value was ambiguous, meaning it was subject to more than one reasonable interpretation. The majority reasoned that an “average insurance consumer” reading the policy would conclude that his or her loss would “be determined according to what it would cost to replace the property, less depreciation.” Rejecting Farmers’ arguments regarding the ordinary meaning of “fair market value,” the majority concluded “there is nothing intrinsic in the notion of [fair market value] that necessarily includes or excludes sales tax.” Because ambiguities are resolved in the insured’s favor under established case law, the majority ruled in favor of Ms. Holden.

The three dissenting justices focused on the ordinary meaning of “fair market value” as being “what a willing buyer under no obligation to buy would pay a willing seller under no obligation to sell.” The dissent concluded that the only reasonable interpretation of “fair market value” is to exclude taxes, as a willing seller is unlikely to include taxes in the amount he would accept for an item, given that the state receives the taxes. The dissent also reasoned that the majority’s decision negated any independent meaning of the replacement cost coverage, for which Ms. Holden paid additional premium, as both coverages would result in payment of replacement cost including sales tax.