RTFP – Failure to Read the Full Policy Not an Excuse

One Cannot Justifiably Rely on a Purportedly Unclear Statement in a Contract When Reading the Contract in Full Would Remove Any Lack of Clarity

Read this and more than 2950 posts at my blog, Zalma on Insurance, here. Posted on January 8, 2020 by Barry Zalma

When a plaintiff admitted he did not read his homeowners policy only to find that an Endorsement limited coverage to Actual Cash Value (ACV) for windstorm damage to a roof not the full replacement cost (RCV) that other claims on his homeowners policy would pay for other losses. In Murray Richelson v. Liberty Insurance Corporation, Case No. 19-3035, United States Court of Appeals for the Sixth Circuit (January 6, 2020) found his claim and attempted class action unconvincing.

FACTS

Murray Richelson entered into an insurance contract with Liberty Insurance. Richelson purports not to have read, at the time of signing, language in that contract that is now in dispute and today reads that language differently than does Liberty.

A windstorm caused damage to the roof of Murray Richelson’s home. Citing that storm damage, Richelson filed a claim with Liberty Insurance, from whom Richelson had purchased a homeowner’s insurance policy. An adjustor determined that the cost to replace the roof was $8,960. But Liberty declined to pay Richelson the replacement cost. Liberty instead paid Richelson the amount of the roof’s ACV. Liberty determined the ACV amount by applying the policy’s $1,000 deductible and deducting depreciation from the replacement cost amount. All told, Liberty reimbursed Richelson $4,350.58, less than half of the cost to replace the roof. This led to a dispute regarding the terms of Richelson’s policy.

Section 1 of Richelson’s policy addresses “A. Dwelling with Expanded Replacement Cost.” There, the policy states that “[l]osses covered under Section 1 are subject to a deductible of: $1,000.” Insurance policies also sometimes include “endorsements.” Relevant here is an endorsement to Richelson’s homeowner’s policy that, in large upper-case font, the endorsement reads: “THIS ENDORSEMENT CHANGES YOUR POLICY. PLEASE READ IT CAREFULLY.”

Below that, in equally large upper-case font, this time also in bold, the endorsement addresses: “ACTUAL CASH VALUE LOSS SETTLEMENT WINDSTORM OR HAIL LOSSES TO ROOF SURFACING.” The endorsement provides that losses to “[b]uildings under Coverage A or B, except for their roof surfacing, roof vents and roof flashing materials if the loss to the roof surfacing, roof vents and roof flashing materials is caused by the peril of Windstorm or Hail, [is] at replacement cost without deduction for depreciation . . . .”

Richelson, unhappy, sued in state court a class action complaint against Liberty. Because Richelson was an Ohio resident, and Liberty a Massachusetts corporation with its principal place of business in Massachusetts, there was diversity between them.

Liberty moved to dismiss the case. With respect to Richelson’s “ACV” breach-of-contract claim, the district court rejected as unreasonable Richelson’s interpretation. Rather, Richelson’s coverage (as relevant here) was limited to ACV only. Accordingly, the district court concluded, Richelson’s claim failed as a matter of law.

The district court also rejected Richelson’s argument that the deductible was not part of any calculation except the replacement-cost calculation. That interpretation was unreasonable, the district court concluded, first because it misunderstood the meaning of the term “deductible,” and also because it made the deductible language superfluous for three of the four Section 1 coverages. The district court likewise dismissed Richelson’s fraud claim. The district court concluded that the endorsement should not have gone unnoticed by a reasonable person, given the size of the bolded text used to highlight its importance.

ANALYSIS

Primarily, Richelson argues that Liberty breached the parties’ insurance contract by utilizing ACV, rather than replacement cost, in assessing the payment amount owed to Richelson for the windstorm damage to his roof. Alternatively, if ACV was in fact the proper method for determining the payment amount, Richelson claimed that Liberty nonetheless breached the contract by factoring in a deductible in the calculation for ACV.

The endorsement exempts from the standard coverage the very circumstance at issue. That plain language, in other words, sets forth an exception to replacement-cost coverage for windstorm damage like that experienced by Richelson.

Taking the language of the policy declaration and the endorsement together, the only reasonable interpretation is that the amount of Richelson’s claim for reimbursement for roof damage caused by a windstorm is calculated by utilizing the ACV—not the RCV —of the roof. Put another way, Richelson’s windstorm-based claim was governed not by the general rule (replacement cost), but rather by an express exception to that rule (ACV for roof damage caused by hail or wind). For the roof-damages portion of Richelson’s claim, then, Liberty was only required to pay ACV.

Ohio law understandably requires that we examine the insurance contract as a whole, giving meaning to each of its parts. Under Ohio law, where the court must give fair meaning to all language in the contract, Richelson’s interpretation of the ACV-related provision is not reasonable. Accordingly, he has not alleged a viable theory of breach by Liberty.

Failing to offer a reasonable reading of the policy language, Richelson alternatively argues that the policy language is so misleading that he was fraudulently induced into signing the contract. Richelson’s fraud claim was resolved by the court based solely on his failure to plausibly allege justifiable reliance.

An insured cannot justifiably rely on a purportedly unclear statement in a contract when reading the contract in full would remove any lack of clarity. Richelson cannot say that he was misled into signing a paper which was different from what he intended to sign when he could have known the truth by merely looking when he signed.

If Liberty was trying to hide the endorsement ball, as Richelson suggests, it did quite a poor job. The need to review the endorsement language was eminently clear to a reasonable reader. That is enough to doom Richelson’s fraud claim.

When interpreting policy language in an insurance contract, Ohio courts will construe ambiguous language against the insurer and in favor of the insured. Where an insurer has utilized contract language that is clear and unambiguous, Ohio courts will construe that language by giving it its ordinary and plain meaning. This latter principle resolves Richelson’s case.

The district court thus properly dismissed Richelson’s fraud claim.

ZALMA OPINION

I have written and opined for dozens of years that when dealing with a dispute over insurance coverage it is the obligation of the insured, his or her lawyers, the insurer and the court, to read the full policy. Failure to do so, and attempting to change the meaning of the policy wording after a loss, is a fool’s errand. Richelson’s hope of creating a highly profitable – for his lawyers – class action, was dashed because he did not read the policy and the Sixth Circuit Court of Appeal did.

? 2020 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at https://www.zalma.com and [email protected].

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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