Washington's Supreme Court Finds Coverage For Actual Cash Value Includes State Sales Tax
In Holden v. Farmers Ins. Co. of Wash., 2010 Wash. LEXIS 721 (September 9, 2010), the Washington Supreme Court held that because an “actual cash value” (“ACV”) provision in a Broad Form Renters Package Policy was ambiguous, it must be read in favor of the insured to include consideration of Washington State sales tax in calculating the “fair market value” (“FMV”) of damaged property.
Farmers insured Holden under a Broad Form Renters Package Policy, which included coverage for fire damage. A fire damaged or destroyed some of the insured’s personal property. Farmers paid the ACV of the damaged property but declined to pay for sales tax on the items. The insured brought a putative class action seeking a declaration that sales tax should be accounted for in the ACV calculation for her claim and requesting relief for all similarly situated insureds.
The Farmers policy provided that “[c]overed 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 ACV as “the fair market value of the property at the time of loss.” The policy did not, however, define FMV or specify what method Farmers would use to calculate ACV or FMV. The policy was also silent on whether sales tax is accounted for in calculating ACV or FMV. With her policy, the insured also purchased a “Contents Replacement Cost Coverage” endorsement (“RCE”). The RCE provided for “the full cost of repair or replacement without deduction for depreciation.” “Replacement cost” was defined as “the cost, at the time of loss, of a new article identical to the one damaged, destroyed or stolen.”
The RCE provision required the insured to first pay the cost of repair or replacement out-of-pocket to replace or repair the damaged property, and submit receipts to Farmers for reimbursement under the RCE. Farmers often paid for sales tax under the RCE upon proof that it has been incurred. As the insured could not afford to pay to replace the damaged property and wait for reimbursement she did not make a claim under the RCE but instead made a claim under the ACV provision. Under the ACV provision, however, Farmers included sales tax in replacement cost only when the policyholder had actually replaced the damaged property, and so declined to pay for sales tax.
The court found that the ACV provision makes no distinction between the value of ACV coverage when an insured has the wherewithal to immediately replace all lost or damaged property versus when the insured must instead settle for the cash and replace what he or she can. Finding the ACV provision in Farmers policy to be ambiguous, and, applying settled Washington law, the court read the provision favorably to insureds to include consideration of sales tax in calculating the FMV of damaged property. The court also noted that coverage of sales tax does not result in a “windfall” to an insured who does not immediately replace damaged property because the sales tax was paid when the damaged property was originally purchased, so the loss is the same regardless of whether the damaged property is actually replaced. Instead, payment for the sales tax returns the insured to the same financial position the insured enjoyed before suffering a property loss.
