RTFP – By Reading the Full Policy Court Concluded that the Insurer Followed the Requirements of State Regulation
An Illinois Regulation allows an insurer to agree to pay license fees, sales tax and title fees but does not mandate it does so unless the costs and fees are actually incurred by the insurer. The plaintiff, seeking to make a great deal of money by creating a class action, sought more coverage from his insurer than it promised.
In Nathan Sigler v. GEICO Casualty Company and GEICO Corporation, No. 19-2272, United States Court of Appeals For the Seventh Circuit (July 24, 2020) Nathan Sigler totaled his 2001 Dodge Ram and filed a claim with GEICO, his auto insurer, for the loss. GEICO paid him for the value of the car, adjusted for depreciation, minus his deductible. Sigler claimed he was entitled to more—namely, sales tax and title and tag transfer fees for a replacement vehicle, though he did not incur these costs. He filed a proposed class action against GEICO seeking damages for breach of contract.
The district court dismissed the suit, holding that neither the GEICO policy nor Illinois insurance law requires payment of these costs when the insured does not incur them.
The premise of Sigler’s suit was that sales tax and title and tag transfer fees are always part of “replacement cost” in a total-loss claim—regardless of whether the insured incurs these costs.
On the other hand the Seventh Circuit noted that the Illinois Administrative Code requires a settling auto insurer to pay these costs only if the insured actually incurs and substantiates them with appropriate documentation.
An adjuster determined that the vehicle was a total loss and calculated a base value of $3,151.95. GEICO paid Sigler that amount minus his $500 deductible.
Sigler sued GEICO in federal court in Central Illinois alleging that the insurer owed him additional money as part of the replacement cost for his vehicle—specifically, a $95 title transfer fee, a $25.50 tag transfer fee, and sales tax “in the minimum amount of $196.99.” He did not allege that he purchased or leased a replacement vehicle and actually incurred these costs. Rather, he asserted that GEICO’s insurance policy promises to pay the equivalent of these costs in every total-loss claim without regard to whether the insured obtains a replacement vehicle and actually incurs these costs. Sigler, with an alleged loss of about $300 proposed to represent a class of policyholders on a breach-of-contract claim against GEICO for “systematically underpaying its insureds.”
GEICO moved to dismiss for failure to state a claim arguing that nothing in the insurance policy’s coverage provisions could reasonably be interpreted as a promise to reimburse Sigler for vehicle-replacement costs that he had not incurred. GEICO also argued that an Illinois insurance regulation, incorporated into the policy as a matter of law, requires reimbursement of these costs only if the insured has purchased or leased a replacement vehicle and can document that he paid taxes and transfer fees. The judge agreed with GEICO.
The interpretation of an insurance policy is a question of law. In Illinois, as elsewhere, insurance disputes are governed by general contract principles, but because an insurance policy is a distinctive type of contract, questions of policy interpretation are subject to special rules that account for the type of coverage purchased, the nature of the risks involved, and the overall purposes of the policy.
In a section entitled “Limit of Liability,” the policy places a ceiling on GEICO’s payment obligation: “The limit of our liability for loss … [i]s the actual cash value of the property at the time of the loss.” “Actual cash value” is defined as “the replacement cost of the auto or property less depreciation or betterment.” Sigler’s claim rests on this language. He contends that in every total-loss claim, GEICO is contractually obligated to pay “actual cash value,” defined as “the replacement cost of the auto or property less depreciation or betterment.” Although “replacement cost” is not further defined, Sigler argues that it must always include amounts equal to the applicable sales tax and title and tag transfer fees because Illinois collects these taxes and fees whenever vehicles are purchased or leased. And GEICO must pay, he continued, whether or not the insured purchases or leases a replacement vehicle and actually incurs these costs.
The Seventh Circuit concluded that Sigler’s argument misconstrued a limitation on liability as a promise to pay. Put slightly differently, Sigler mistakes a liability ceiling for a floor. The Limit of Liability section of the policy doesn’t promise to pay these costs regardless of whether the insured incurs them; it simply describes the most that GEICO will pay in the event of a covered loss.
An Illinois insurance regulation specifically addresses when an auto insurer must pay sales tax and title and tag transfer fees in a total-loss claim, and the regulation is incorporated into the policy as a default term as a matter of law.
The Illinois Administrative Code provides that when an auto insurer determines that an insured vehicle is a total loss as a result of a collision, the insurer MAY elect to either replace the insured vehicle or pay a cash settlement. If the insurer chooses to pay a cash settlement, the regulation requires payment of applicable sales tax and title and transfer fees only when the insured purchases or leases a new vehicle within a specified time and substantiates that he has incurred these costs. The regulation mandates payment of these costs if and only if the insured (1) has purchased or leased a vehicle within 30 days of receiving a cash settlement and incurred applicable sales taxes and fees and (2) substantiates the purchase and payment of those taxes and fees by submitting appropriate documentation to the insurer within 33 days after the receipt of the settlement.
To be sure, an insurer may contractually obligate itself to pay these costs. But “may” is a permissive term, and permissive statutory or regulatory language, by definition, does not command anyone to do anything. The traditional, commonly repeated rule is that shall is mandatory and may is permissive.
A straightforward reading of GEICO’s policy and the incorporated regulation defeats Sigler’s claim. Accordingly, his claim for breach of contract necessarily fails.
People who believe they were deprived of insurance benefits, even an amount like Sigler’s about $300, see stars and millions if they can get a court to certify a class action. He failed because he and his lawyers, unlike the court, failed to read the full policy that required actual replacement of the vehicle within a limited amount of time to recover his $300. If he had RTFP he would not have wasted his time, that of his lawyers, GEICO and the court to bring this suit and appeal.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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