Do Valued Policy Laws Apply to Builders Risk Policies?

A Missouri case decided an issue about whether Missouri’s Valued Policy Law applies to an instance of a builder’s risk policy where the structure was not completely constructed but a total loss to the insured structure occurred. 1 The court first cited Missouri’s valued policy law:

Mo.Rev.Stat. § 379.140. Company not to deny value – full amount of policy to be paid.

In all suits brought upon policies of insurance against loss or damage by fire hereafter issued or renewed, the defendant shall not be permitted to deny that the property insured thereby was worth at the time of the issuing of the policy the full amount insured therein on said property; and in case of total loss of the property insured, the measure of damage shall be the amount for which the same was insured, less whatever depreciation in value, below the amount for which the property is insured, the property may have sustained between the time of issuing the policy and the time of the loss, and the burden of proving such depreciation shall be upon the defendant; and in case of partial loss, the measure of damage shall be that portion of the value of the whole property insured, ascertained in the manner prescribed in this chapter, which the part injured or destroyed bears to the whole property insured.

A deeply researched paper on the topic of valued policy laws, Valued Policy Laws: A Comparative Analysis, 2 by an experienced coverage attorney, Michael Skeary, noted the following purposes of such laws:

Valued policy statutes have a number of purposes. One purpose is to relieve the insured from having to prove the value of the property, through a formal proof of loss or otherwise, after being totally destroyed. The rationale being that, at the time of total loss, the value of the property is difficult to determine because the usual evidence relied upon for such valuation is gone. The statutes also prevent insurers from collecting premiums on overvalued properties and then limiting payment to a lesser amount when a loss occurs. In essence, the statutes prevent the insurer from receiving premiums on one basis and paying losses on another, thereby promoting inspection and discouraging overvaluation of the insured property. Elimination of overvaluation has the effect of protecting insureds from the payment of inflated or excessive premiums and insurers from the moral hazards that may arise when property is insured in excess of its actual value. In addition, the statutes simplify and facilitate prompt settlement when a total loss occurs, as disputes and litigation are theoretically avoided when insureds and insurers agree in advance to the value of the insured property. The insured limits the recovery to the face amount of the policy and the insurer charges a premium commensurate with its maximum exposure. Consequently, when a total loss occurs, neither the insured nor the insurer can contend that the value of the total loss is different from what was previously specified in the policy.

The policyholder argued that despite the fact that the building was only partially completed when a total loss occurred, the valued policy law applied to all Missouri contracts where the fire resulted in a total loss. The policyholder argued that the insurer had to pay the full policy limit of the insurance based on a literal reading of the Missouri statute.

The Missouri court disagreed, citing older Missouri precedent about a total loss of a partially completed building not being subject to Missouri’s valued policy law:

In Jones v. State Farm Fire and Cas. Co., 740 S.W.2d 708 (Mo. App. 1987), the Court [sic] stated:

The purpose behind the valued policy legislation is to prevent overinsurance…. The concerns which resulted in enactment of the valued policy legislation in Missouri do not appear in this case, and do not compel payment of the full limits of liability for the loss of a partially completed structure. In fact, payment of the face value of the policy would conflict with our public policy to prevent wagering under the guise of insurance and temptation to destroy the insured property … If [plaintiffs] were allowed to recover $690,000 for a fire that damaged them only $440,393.09 they would be profiting from the fire…. It would be against public policy for an insurer to pay the full amount of the policy where the amount insured is provisional upon the percentage of the building completed. The amount due on the policy is that agreed upon by the parties as the value of the property destroyed by the fire.

The court ruled for the insurer, finding:

[T]he court finds that the Mo.Rev.Stat. § 379.140 is not applicable to plaintiff’s policy of insurance because the property was undergoing renovation at the time and was covered by a builder’s risk policy. As noted by AGCS, the policy language and the premium charged, both reflect a provisional limit of insurance during the renovations. The policy also contains other language indicating that the applicable limit of liability in the event of a loss prior to completion of construction was not the full value of the building. AGCS notes that plaintiff is not an individual homeowner who is unfamiliar with property insurance, rather plaintiff is a company engaged in purchasing and renovating and reselling homes for profit. AGCS notes that plaintiff did not pay a premium for a policy that would pay plaintiff its anticipated profit in the event of a loss to the property. Rather, plaintiff chose to purchase a policy that would pay its lost invested capital in the event of a loss while the property was under renovation. Accordingly, because the Court finds that the Valued Policy Statute does not apply and that the terms of the policy control and because AGCS properly determined that plaintiff should be paid its investment capital pursuant to the policy and paid this amount to plaintiff, the Court hereby GRANTS AGCS’s Motion for Summary Judgment.

This decision makes sense. Valued policy laws were never made to allow policyholders of partially built structures to collect the full policy limit. In Valuation Issues in Florida, Part I: The Historical Purpose of Valued Policy Laws, I noted the primary consumer protection interest of valued policy laws when policyholders had a total loss:

Valued policy laws, or the so-called “total loss” statutes, were first enacted in the United States in the late 1800s, principally as protective measures for insureds. According to the annals of insurance history, the first VPL emerged in Wisconsin in response to a business practice of some fire insurance companies which, acting through their agents, bound policies in excess the value of the property at higher premiums, but when a loss occurred, the carriers would scale down the loss payment to the point of actuarial health and safety, thus over-collecting premiums and underpaying losses.

The primary consumer protection purpose of valued policy laws was to prevent insurers from profiting by over-insuring buildings. This is not the case when a building is only partially completed and insured under a builder’s risk policy.

Thought For The Day

A people without the knowledge of their past history, origin, and culture is like a tree without roots.
—Marcus Garvey

1 Goliath Homes v. AGCS Marine Ins. Co., 532 F.Supp.3d 813 (2020).
2 Michael J. Skeary, Valued Policy Laws: A Comparative Analysis. 44 Tort Trial & Ins. Prac. L.J., 1067 (Spring/Summer, 2009).