The Washington Supreme Court held today in Holden v. Farmers Ins. Co. that an insured was entitled to recover sales tax under an actual cash value (“ACV”) loss settlement provision in her renter's insurance policy because of ambiguity regarding whether ACV includes sales tax.
The claim arose out of a fire to Laura Holden’s apartment, which damaged her personal property. Ms. Holden’s policy provided for settlement at ACV, but included an endorsement that would have allowed her to recover at replacement cost if she replaced the property within 180 days of the loss. Ms. Holden elected not to replace the damaged property. The carrier paid Ms. Holden $1,174, based upon the fair market value (“FMV”) of her loss. (This was apparently a rather small fire.) The loss payment, however, did not include sales tax. Ms. Holden argued that the ACV payment should have included an adjustment based upon sales tax even though she did not replace the damaged property.
In its 6 to 3 decision, the Washington Supreme Court held that the following provision was ambiguous regarding whether Ms Holden was entitled to recover sales tax:
The policy defined ACV as FMV but did not define FMV. The Supreme Court acknowledged that in another (non-insurance) context FMV “is the amount of money which a well informed buyer, willing but not obliged to buy the property, would pay, and which a well informed seller, willing but not obligated to sell it, would accept.” However, the court held this definition of FMV did not resolve the sales tax issue and that there is nothing intrinsic in the notion of FMV that necessarily includes or excludes sales tax.
In construing the loss settlement provision, the court considered evidence regarding the insurer’s claims handling practices in unrelated claims including that the insurer sometimes determined ACV by applying depreciation to replacement cost value, and sometimes included sales tax in its determination of replacement cost.
The court noted that the policy’s loss settlement provision does not clearly exclude or include sales tax and does not define FMV. The fact that the loss settlement provision references replacement cost, combined with the carrier’s claims handling practices, and the lack of a definition of FMV, according to the majority, created an ambiguity, which must be resolved in favor of the insured.
The claim arose out of a fire to Laura Holden’s apartment, which damaged her personal property. Ms. Holden’s policy provided for settlement at ACV, but included an endorsement that would have allowed her to recover at replacement cost if she replaced the property within 180 days of the loss. Ms. Holden elected not to replace the damaged property. The carrier paid Ms. Holden $1,174, based upon the fair market value (“FMV”) of her loss. (This was apparently a rather small fire.) The loss payment, however, did not include sales tax. Ms. Holden argued that the ACV payment should have included an adjustment based upon sales tax even though she did not replace the damaged property.
In its 6 to 3 decision, the Washington Supreme Court held that the following provision was ambiguous regarding whether Ms Holden was entitled to recover sales tax:
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 ACV as FMV but did not define FMV. The Supreme Court acknowledged that in another (non-insurance) context FMV “is the amount of money which a well informed buyer, willing but not obliged to buy the property, would pay, and which a well informed seller, willing but not obligated to sell it, would accept.” However, the court held this definition of FMV did not resolve the sales tax issue and that there is nothing intrinsic in the notion of FMV that necessarily includes or excludes sales tax.
In construing the loss settlement provision, the court considered evidence regarding the insurer’s claims handling practices in unrelated claims including that the insurer sometimes determined ACV by applying depreciation to replacement cost value, and sometimes included sales tax in its determination of replacement cost.
The court noted that the policy’s loss settlement provision does not clearly exclude or include sales tax and does not define FMV. The fact that the loss settlement provision references replacement cost, combined with the carrier’s claims handling practices, and the lack of a definition of FMV, according to the majority, created an ambiguity, which must be resolved in favor of the insured.
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