What Is a “Total Loss by Fire” in Texas?
In the face of claims arising from wildfires in the Texas Panhandle, it is worth keeping in mind some general conditions necessary to establish a “total loss” by fire. Though the Texas Insurance Code defines coverage for a total loss, insurers should stay up to date on the standards set by state case law when evaluating claims.
Texas Insurance Code
Texas Insurance Code § 862.053, provides as follows:
(a) A fire insurance policy, in case of a total loss by fire of property insured, shall be held and considered to be a liquidated demand against the company for the full amount of such policy. This subsection does not apply to personal property.
(b) An insurance company shall incorporate verbatim the provisions of Subsection (a) in each fire insurance policy issued as coverage on real property in this state.
If there is a covered total loss by fire to a covered building, a carrier owes the full limits of the building coverage for the property insured. Even if there is a total loss by fire, however, the same does not require the carrier to pay full policy limits for other policy coverages such as contents, extra expense, business income or ALE.
The question then turns to what a “total loss by fire” is under Texas law.
“Total Loss by Fire” – Texas Supreme Court Definition
The initial burden of establishing whether a building is a “total loss by fire” is on the insured. Since 1896, the Texas Supreme Court has defined what a “total loss” is not, as follows:
“There can be no total loss of a building so long as the remnant of the structure standing is reasonably 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 the injury, would, in proceeding to restore the building to its original condition, utilize such remnant as a basis[.]”
In other words, under this definition, “[w]hether a building is an actual total loss by fire depends upon whether a reasonably prudent owner, uninsured, desiring to rebuild, would have used the remnant for restoring the building.” In Canal Ins. Co. v. Hopkins, the court confirmed “[p]roperty is a total loss if a reasonably prudent uninsured owner, desiring to restore the property to its pre-incident condition, would not utilize that property for such restoration.”
The corollary of this rule is that a building is not a total loss if both of these conditions are met:
(1) The remnant can be reasonably adapted for use as a basis to reconstruct the building.
(2) A reasonable uninsured person would do so.
If either the remnant would not be adaptable as a basis to reconstruct the building, or if a reasonable uninsured person would not use it even if it were, the building is a “total loss.” After McIntyre, the Texas Supreme Court also clarified in Fire Assoc. of Phila. v. Strayhorn that the standing remnant must be a “substantial” part of the building. Texas case law is clear these are almost always fact questions for the jury.
Rules Emerging from McIntyre
Over time, courts have applied the McIntyre rule in other cases and weighed whether particular facts are or are not enough to establish, or disprove, whether a building is a “total loss by fire.” Certain rules have emerged from this case law, which we summarize below.
1. No Expert Testimony Needed
Courts do not require the insured to present expert testimony as to whether a building is a total loss. The court in Lincoln County Mutual Fire Ins. Co. v. Smith, for example, held “[a]lthough no witness testified whether or not such a remnant would have been adaptable as a basis for rebuilding, we are inclined to think and so hold that the jury could properly resort to their common knowledge and experience in determining the question.”
2. The Policyholder Needs Some Evidence
The Texas Supreme Court ruled the policyholder does need to present at least some evidence that a home is a total loss if there is a dispute with their carrier. In State Farm Fire & Cas. Co. v. Mower, an insured’s home burned, leaving only the foundation and about 85% of the garage. The insured solicited two bids for repair, both of which intended to use the existing foundation in the reconstruction. The bids were about 50% of the full policy limits for dwelling. The carrier offered to pay the higher bid, but the insureds claimed the property was a total loss, and sought the full policy limits. A jury agreed with the policyholder and awarded the full policy limits. The carrier then appealed, arguing there was no evidence from which the jury could conclude the home was a total loss.
On appeal, the insureds pointed to the adjuster’s initial (incorrect) assumption that the rebuild cost would exceed the policy limits, but the court found “the adjuster’s conclusion, even if it had turned out to be right, does not meet the legal test for total loss.” The only evidence in the case were the two estimates that called for a rebuild on top of the existing foundation. The court therefore reversed the jury’s verdict, holding “[t]he evidence in this case is undisputed that the garage would be used in reconstruction. There is no evidence that a reasonably prudent owner in the [policyholder’s] 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.”
3. Conflicting Evidence is Usually for the Jury to Weigh
The Texas Supreme Court held that conflicting evidence of partial versus total loss creates a question for the jury to resolve. It confirmed in St. Paul Fire & Marine Ins. Co. v. Crutchfield that “[w]hile the evidence may be conflicting, there was direct testimony by one or more witnesses who viewed the structure after the fire and who testified to the effect that the loss was total. The mere fact that some of the charred structure might have been used in new construction does not make the loss partial. We believe a jury issue on the question of total loss was properly raised[.]” In St. Louis Fire & Marine Ins. Co. v. Silverman, the court held “[w]e have carefully considered appellant's second point. Unquestionably appellant's evidence was sufficient to have supported a verdict that the house was not a ‘total loss' from fire, had the jury accepted appellant's evidence as true. But such evidence was in conflict with the evidence submitted by appellee. The credibility of the testimony was for the jury, and appellee's evidence was sufficient to support the finding.”
Notably, however, an appellate court commented that if competing evidence “was of such conclusive nature that only one reasonable inference can be drawn,” the trial judge may determine the issue as a matter of law without submitting the question to the jury.
4. An Open Question: “Constructive” Total Loss by Reason of Building Codes
Questions have also arisen as to whether, if a remnant of a building could be used as the basis to rebuild the property, though doing so would violate city ordinances, the building is a “constructive total loss” requiring the carrier to tender full policy limits. Constructive total loss is generally a concept applicable to maritime vessels. The court in Glens Falls Ins. Co. v. Peters raised the question of whether constructive total loss applied to fire-damaged buildings but did not reach it due to procedural defects in the underlying claim.
The Peters court did hold, however, that a city inspector’s determination a building was damaged more than 50% and should be razed was not binding on the insurer where the city never condemned the building or ordered it to be destroyed. The court did not comment on what its ruling would be if the city did condemn the building or order it to be destroyed. To date, we have found no court that applied the concept of “constructive total loss” in the context of fire damage to a building. This may be an emerging issue in light of the wildfires in the Panhandle.
Contact Clinton Wolbert or any member of Phelps’ Insurance team if you have questions or need advice and guidance.
