“Total Loss” In An Insurance Policy

Unfortunately, at some point a person in Grand Prairie, Arlington, Weatherford, Dallas, Fort Worth, Crowley, Aledo, Benbrook, and other places in Texas will experience a property loss. This loss may be to their home or their car or some other piece of property. The question will then be; Is the property a “total loss” or is it repairable?
BusinessDirectory.com defines total loss as: Destruction of an asset or property to the extent that nothing of value is left, and the item cannot be repaired or rebuilt to its pre-destruction state. It then says, “some types insurance policies pay the maximum covered amount only in case of total loss.” What is important here is how total loss is determined regarding an insurance policy.
A case decided in 1995 is worth looking at to help understand how a “total loss” is determined. The case was decided by the Texas Supreme Court and is styled, State Farm Fire & Casualty Company and State Farm Lloyds v. Ronald and Marilyn Mower.
Here are the facts: The Mowers insured their home with State Farm Fire & Casualty Company for $175,000. After it burned, State Farm hired an independent adjuster to investigate the loss. Only the foundation and about 85% of the garage remained. The adjuster concluded, before any repair estimates could be made, that the cost of reconstructing the home would exceed the amount of coverage. He also believed that the remnants could be used in rebuilding.
The Mowers solicited two reconstruction bids, one from the original builder, for $88,139, and the other from a builder who specialized in rebuilding fire-damaged homes, for $85,900. Both bids expressly stated that the garage and slab foundation would be used in reconstruction, although the original builder would not guarantee the slab. When the adjuster learned of these bids, he concluded that the Mowers’ home was not a total loss after all and recommended that State Farm pay the Mowers the amount of the higher bid, plus minor additional living expenses. State Farm twice offered the Mowers $90,000, but they demanded $104,000, the payoff on their mortgage. The mortgagee, also insured under the policy, informed the Mowers that it would accept State Farm’s offer if they did not.
This lawsuit resulted and the Mowers insisted they be paid the policy limits of $175,000. The issue became whether or not the home was a total loss and how to determine whether it was or not.
The Supreme Court emphasized that they have consistenly defined “total loss” as follows:
There can be no total loss of a building so long as the remnant of the structure is reasonable adapted for use as a basis upon which to restore the building to the condition in which it was before the injury; that whether it is so adapted depends upon the question whether a reasonably prudent owner, uninsured, desiring such a structure as the one in question was before injury, would, in proceeding to restore the building to its original condition, utilize such remnant as such basis ….
The court concluded that the home was not a total loss and in discussing that conclusion said the following:
The Mowers argue that the adjuster’s initial conclusion that the cost of reconstructing their home would exceed policy limits is some evidence that it was a total loss. But the adjuster’s conclusion, even if it turned out to be right, does not meet the legal test for total loss. The Mowers argue that the State Farm employee with responsibility for their claim testified that the house appeared to have sustained severe damage and that if it had been his house, he would have thought it had burned down. Again, this testimony does not speak to the legal standard of whether there were remnants usable in reconstruction. The only evidence in the case, from the two bids the Mowers obtained is that the foundation and garage would be used in rebuilding the house. Even if a reasonably prudent owner would not rebuild a house with a foundation that could not be guaranteed, the evidence in this case is undisputed that the garage would be used in reconstruction. There is no evidence that a reasonable prudent owner in the Mowers’ shoes would not have used the remnants to rebuild their house. There was thus no evidence that the Mowers’ home was a total loss; indeed, the uncontradicted evidence established that the home was not a total loss. The Mowers were entitled to recover under their policy only the $90,000 required to rebuild their home.
This issue comes up a lot in property loss claims and it is advisable to seek the help of an experienced Insurance Law Attorney to make sure your rights under the policy of insurance are not violated. For homes this applies to the majority of fire loss claims but this issue of total loss also comes up frequently in auto wreck claims.