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The U.S. Court of Appeals for the Ninth Circuit, affirming a district court's decision, has ruled that an insured could not “replace” his warehouse after it was destroyed by fire with an apartment complex, even though both structures provided rental income.

The Case

After a fire destroyed Farhad Yaghoubi's commercial warehouse, he sought to recover from his insurer, Travelers Casualty Insurance Company of America, the costs he expended in purchasing an apartment complex instead of seeking funds to rebuild the warehouse.

Travelers denied Mr. Yaghoubi's request and he sued Travelers for breach of contract and breach of the implied covenant of good faith and fair dealing.

The U.S. District Court for the Central District of California granted summary judgment for Travelers, finding that the policy's replacement-cost provision did not authorize reimbursement for the costs of a building that served a different purpose than the insured property.

Mr. Yaghoubi appealed to the Ninth Circuit, arguing that the policy conflicted with California Insurance Code Section 2051.5(a)(1), which provides that in the case of property destruction, replacement cost coverage includes “the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured[.]” He contended that the term “replace” as used within the section did not require that the replacement structure be “used for the same purpose” as the insured structure and, therefore, that the policy's same-use requirement conflicted with Section 2051.5's purpose. Reimbursement should be made, he argued, for any structure he chose to build following the fire.

The Ninth Circuit's Decision

The Ninth Circuit affirmed.

In its decision, the circuit court explained that the statutory language limited reimbursement to costs to repair, rebuild, or replace the property that was lost or injured.

The Ninth Circuit agreed with the district court that a replacement structure in this context had to serve the same purpose as the original structure.

That both the insured structure and the new structure provided rental income did “not mean that the two structures served the same function within the meaning of the policy or the statute,” the circuit court concluded.

The case is Yaghoubi v. Travelers Casualty Ins. Co. of America, No. 17-56618 (9th Cir. March 22, 2019). Attorneys involved include: For Farhad Yaghoubi, Plaintiff – Appellant: Jeffrey Isaac Ehrlich, Esquire, Attorney, The Ehrlich Law Firm, Claremont, CA; Brian S. Kabateck, Attorney, Kabateck Brown & Kellner, Llp, Los Angeles, CA. For Travelers Casualty Insurance Company of America, Defendant – Appellee: Aaron C. Agness, Weston & McElvain LLP, El Segundo, CA.