STEPHENS, J.
¶ 1 Laura Holden purchased a renter's insurance policy from Farmers Insurance Company of Washington (Farmers). In the event of property loss due to fire, the policy provides coverage for the "actual cash value" (ACV) of the damaged property. ACV is
¶ 2 On June 9, 2004, a fire broke out in the kitchen of the rented house at which Holden and her three children lived. The fire damaged or destroyed some of the family's personal property, including furniture and various kitchen items. At the time of the fire, Farmers insured Holden under a "Broad Form Renters Package Policy" (Policy), which included coverage for fire damage. CP at 91. The Policy contains the following provision on loss settlement:
CP at 99. The Policy defines ACV as "the fair market value of the property at the time of loss." Id. at 93. The Policy does not define FMV or specify what method Farmers will use to calculate ACV or FMV. Nor does the Policy expressly state whether sales tax is accounted for in calculating ACV or FMV.
¶ 3 For an extra premium, Holden also purchased a "Contents Replacement Cost Coverage" endorsement (RCE) with her Policy. CP at 118. The RCE provides for "the full cost of repair or replacement without deduction for depreciation." Id. "Replacement cost" is defined as "the cost, at the time of loss, of a new article identical to the one damaged, destroyed or stolen." Id. The RCE provision requires the insured to actually replace or repair the damaged property within 180 days of the loss. The insured pays the cost of repair or replacement out-of-pocket and submits receipts to Farmers for reimbursement under the RCE. Farmers often pays sales tax under the RCE, upon proof that it has been incurred.
¶ 4 After the fire, Holden submitted a claim to Farmers under the ACV provision of the Policy. Farmers sent Holden a check for $1,174.41, an amount Farmers determined to be the FMV of Holden's property. This amount was calculated with no regard to Washington state sales tax. When Holden requested that sales tax be included in calculating her reimbursement, Farmers informed Holden that if she submitted receipts for coverage under the RCE, only then would her reimbursement include sales tax. Holden explained in her deposition that she opted not to submit her claims under the RCE because she could not afford to pay the out-of-pocket repair or replacement cost and wait for reimbursement from Farmers. Id. at 61, 82.
¶ 5 Holden brought a putative class action against Farmers, seeking a declaration that sales tax should be accounted for in the ACV calculation for her claim and requesting relief for all similarly situated insureds. During discovery, Farmers disclosed that it uses a variety of methods to calculate FMV under the ACV provision, including surveying online markets, hiring an appraiser, and using a replacement-cost-less-depreciation formula. Farmers acknowledged that when it uses replacement cost less depreciation to calculate FMV, replacement cost sometimes includes sales tax. Under the ACV provision, Farmers includes sales tax in replacement cost when the policyholder replaces the damaged property.
¶ 7 The superior court certified the summary judgment order for immediate appeal pursuant to RAP 2.3(b)(4). Farmers filed a motion for discretionary review, which Division One of the Court of Appeals granted. The Court of Appeals then reversed, holding that coverage under the ACV provision does not include sales tax because replacement cost considerations apply only when the property is actually replaced. Holden v. Farmers Ins. Co. of Wash., 142 Wn.App. 745, 752, 175 P.3d 601 (2008). Holden filed a petition for review, which we granted. Holden v. Farmers Ins. Co. of Wash., 164 Wn.2d 1025, 195 P.3d 957 (2008).
¶ 8 Interpretation of an insurance contract is a question of law reviewed de novo. NH Indem. Co., Inc. v. Budget Rent-A-Car Sys., Inc., 148 Wn.2d 929, 933, 64 P.3d 1239 (2003). We look to the whole contract, giving it a "`fair, reasonable, and sensible construction.'" Am. Nat'l Fire Ins. Co. v. B & L Trucking & Constr. Co., 134 Wn.2d 413, 427, 951 P.2d 250 (1998) (quoting Key Tronic Corp. v. Aetna (CIGNA) Fire Underwriters Ins. Co., 124 Wn.2d 618, 627, 881 P.2d 201 (1994)). We give the language of the insurance policy the same construction that an "`average person purchasing insurance'" would give the contract. Woo v. Fireman's Fund Ins. Co., 161 Wn.2d 43, 52, 164 P.3d 454 (2007) (quoting Roller v. Stonewall Ins. Co., 115 Wn.2d 679, 682, 801 P.2d 207 (1990)).
¶ 9 When, as here, a policy term is undefined, it must be given its "`plain, ordinary, and popular'" meaning. Kitsap County v. Allstate Ins. Co. 136 Wn.2d 567, 576, 964 P.2d 1173 (1998) (quoting Boeing Co. v. Aetna Cas. & Sur. Co., 113 Wn.2d 869, 877, 784 P.2d 507 (1990)). A term will be deemed ambiguous if it is susceptible to more than one reasonable interpretation. Id. To help resolve ambiguity, we may look to context and the intent of parties. Quadrant Corp. v. Am. States Ins. Co., 154 Wn.2d 165, 171-72, 110 P.3d 733 (2005). Any remaining ambiguity must be construed against the insurer and in favor of the insured. Id. at 173, 110 P.3d 733.
¶ 10 The ACV coverage at issue provides for the settlement of losses according to the FMV of the damaged property. Farmers advances a technical definition of FMV, but it is the ordinary understanding of the contract that controls. A technical approach fails to account for the way Farmers actually implements the ACV coverage provision. One method Farmers uses to calculate FMV looks at current replacement cost less depreciation. Farmers admits that it sometimes calculates replacement cost to include sales tax, representing the amount of money a buyer would actually have to spend to replace the damaged property. The language of the ACV provision plainly allows for looking at replacement cost in calculating the insured's loss:
CP at 99 (emphasis added). This policy provision suggests to the average insurance consumer that his or her loss will be determined according to what it would cost to replace the property, less depreciation to reflect the age or wear and tear of the damaged property.
¶ 11 Yet, Farmers argues and the dissent concludes that sales tax must be excluded from any replacement cost calculation on the ground that FMV, as used in other contexts, excludes consideration of taxes. See Farmers' Suppl. Br. at 8-12; Dissent at 350-51. The dissent notes that inheritance tax and property tax are assessed on the FMV of taxable items before tax. If tax were included, the argument goes, an endless cycle would be created because one would need to know the tax in order to determine the FMV, in order to determine the tax, etc. The problem with this "chicken and egg" argument is that the meaning of FMV in other contexts is irrelevant. Its meaning in the context of this insurance contract is what matters, which is why Farmers' own practice of including sales tax is critical. Indemnifying a policyholder for his or her actual loss is quite different from valuing property for the purpose of assessing an inheritance, property, or capital gains tax.
¶ 12 Nor does it advance the argument to say that the traditional notion of FMV necessarily excludes transaction costs, such as sales tax, because these extra costs do not add to the value of an object. Farmers' policy does not define FMV in this manner. Indeed, it does not define the term at all. We have recognized in other contexts that the common understanding of "`"[f]air market value" is the amount of money which a well informed buyer, willing but not obliged to buy the property, would pay, and which a well informed seller, willing but not obligated to sell it, would accept.'" State v. Rowley, 74 Wn.2d 328, 334, 444 P.2d 695 (1968) (quoting a jury instruction). Sales tax represents a portion of the actual out-of-pocket expense to the buyer and bears on the decision to buy. Accordingly, there is nothing intrinsic in the notion of FMV that necessarily includes or excludes sales tax.
¶ 13 Faced with the fact that Farmers only sometimes interprets FMV to include sales tax—namely, when a policyholder replaces damaged property under the ACV provision—the Court of Appeals asserted that such practice reflects "a consistent application of the principles of indemnification." Holden, 142 Wash.App. at 752, 175 P.3d 601. But, whether an ACV claimant actually replaces damaged property has no logical bearing on the property's FMV. Consider an example in which two different policyholders own identical sofas that are destroyed in fires. Each seeks coverage under the ACV provision, so Farmers must determine the sofas' ACVs. If one of the policyholders buys a new sofa, does this fact affect the value of the old sofa that was destroyed? Does it mean that this policyholder's sofa was worth more than the identical sofa of the policyholder who did not buy a new one? Of course not; the value of the old sofas was the
¶ 14 Farmers argues that indemnity does not support including sales tax in the ACV calculation when an RCE-covered insured does not replace the property. See Farmers' Suppl. Br. at 14-15, 17. This argument insinuates that the same ACV language should be interpreted differently depending upon whether the policyholder also purchased RCE coverage. Cf. Dissent at 352-53 (interpreting Holden's ACV coverage differently because she also purchased RCE coverage). The indemnity argument fails to recognize Holden's full loss and does not reflect how ACV coverage works. Regardless of whether the insured replaces the lost or damaged property, she paid sales tax when buying it originally. Holden's loss, for example, included the sales tax she paid when she bought the furniture and kitchen items. Furthermore, taking sales tax into account does not result in her reaping a windfall. Holden is not being paid an amount for sales tax she never incurred. Rather, the sales tax is simply included in calculating the replacement cost of the damaged property before subtracting for depreciation, which is one way to estimate the property's current value. Under Farmers' indemnity analysis, Holden is denied the full benefit of her ACV coverage because she purchased RCE coverage but did not use it.
¶ 15 There is no legal authority for interpreting a policy provision differently for different policyholders depending on what other coverage is purchased—especially when that other coverage is not at issue. The ACV provision, the only provision at issue here, makes no distinction between the value of ACV coverage when a policyholder has the wherewithal to immediately replace all lost or damaged property versus when he or she must instead settle for the cash and replace what he or she can. Holden is entitled to the ACV of her damaged property whether or not she is able to use the insurance proceeds to repair or replace it. Focusing on the ACV provision, as we must, it is at least ambiguous in terms of whether the calculation of ACV will be based on a replacement cost formula that includes sales tax. Given such ambiguity, Holden's reasonable interpretation of the policy must be accepted.
¶ 16 To the extent Farmers relies on precedent to argue that ACV cannot mean replacement cost (including sales tax) minus depreciation, it misconstrues our case law. Farmers cites National Fire Insurance Co. v. Solomon, 96 Wn.2d 763, 638 P.2d 1259 (1982), for the proposition that FMV cannot be calculated using the replacement-cost-less-depreciation method. As the Court of Appeals noted, however, neither Solomon nor our subsequent decision in Hess v. North Pacific Insurance Co., 122 Wn.2d 180, 859 P.2d 586 (1993), controls the analysis here because those cases concerned the interpretation of a replacement cost coverage provision, not an ACV provision. Holden, 142 Wash.App. at 751, 175 P.3d 601. The Court of Appeals further noted that any commentary about ACV in those opinions was dictum and neither decision addressed the issue of sales tax. Id. We agree with the Court of Appeals that we are not bound by the discussion of ACV in either opinion.
¶ 17 Because the ACV provision in Farmers' policy is ambiguous, it must be read favorably to insureds to include consideration of Washington State sales tax in calculating the FMV of damaged property. This does not result in a "windfall" to an insured who
¶ 18 The value of coverage under the ACV provision of Farmers' policy does not clearly exclude sales tax on damaged or destroyed property. While the policy defines ACV as FMV, it gives no definition of FMV. Neither does the traditional notion of FMV exclude sales tax from its definition. Farmers sometimes accounts for sales tax when calculating FMV. Moreover, the ACV provision indicates that the measure of recovery is related to "the amount necessary to repair or replace the damaged property." CP at 99. This language, combined with Farmers' practices and the absence of a definition for FMV, creates an ambiguity as to whether sales tax is included under the ACV provision of the Policy. Because we construe this ambiguity against Farmers, the Policy must be read to include consideration of Washington State sales tax. We reverse the Court of Appeals and remand for further proceedings consistent with this opinion.
WE CONCUR: BARBARA A. MADSEN, Chief Justice, CHARLES W. JOHNSON, RICHARD B. SANDERS, TOM CHAMBERS, and MARY E. FAIRHURST, Justices.
J.M. JOHNSON, J. (dissenting).
¶ 19 Laura Holden seeks reimbursement under her renter's insurance policy for the "actual cash value" (ACV) of personal property damaged during a fire in her apartment. Holden's insurance policy defines ACV as the "fair market value" (FMV) of the property at the time of loss. Because the majority erroneously holds that a (theoretical) sales tax should be added to the reimbursement based on its conclusion the term FMV is ambiguous, I respectfully dissent.
¶ 20 The majority concludes that the definition of ACV results in ambiguity because of the use of different methodologies to determine FMV in different contexts. Majority at 346-47, 349. In the majority's view, this results in FMV having more than one reasonable interpretation, which renders it ambiguous. Id. at 351 (citing Kitsap County v. Allstate Ins. Co., 136 Wn.2d 567, 576, 964 P.2d 1173 (1998)). However, the term FMV is capable of a single reasonable interpretation that unambiguously excludes sales tax in this context. See Quadrant Corp. v. Am. States Ins. Co., 154 Wn.2d 165, 171-72, 110 P.3d 733 (2005) (context and intent of parties are relevant considerations when interpreting contracts).
¶ 21 Reading FMV so as to exclude taxes—both in Holden's insurance policy and elsewhere—captures the likely perceptions of "`the average person purchasing insurance,'" the perspective that we must assume when interpreting insurance contracts. Overton v. Consol. Ins. Co., 145 Wn.2d 417, 424, 38 P.3d 322 (2002) (quoting Sears v. Grange Ins. Ass'n, 111 Wn.2d 636, 638, 762 P.2d 1141 (1988)). Indeed, viewed from the perspective of ordinary insurance customers like Holden, it is the only reasonable interpretation of the term. To illustrate, consider the fact that it is customary to calculate taxes based on FMV or "market value," not to calculate FMV inclusive of taxes. In calculating the FMV of various bonds for inheritance tax purposes, for example, this court specified that the term means "the amount of money which a purchaser willing, but not obligated, to buy would pay an owner willing, but not obligated to sell." In re Estate of Eggert, 82 Wn.2d 332, 335, 510 P.2d 645 (1973); see also In re Estate of Toomey, 75 Wn.2d 915, 919, 454 P.2d 420 (1969) (inheritance tax "must, therefore, be measured by what is called the fair market value"). Likewise, in commenting on property taxes based on "market value," this court indicated that the term means "what a willing buyer under no obligation to buy would pay a willing seller under no obligation to sell." Wash. Beef, Inc. v. Yakima County, 143 Wn.App. 165, 172, 177 P.3d 162 (2008); see also Cascade Court Ltd. P'ship v. Noble, 105 Wn.App. 563, 567, 20 P.3d 997 (2001) (giving the same definition).
¶ 22 Leaving aside the fact that a willing seller is unlikely to include sales tax in the amount that he would accept for an item,
¶ 23 This conclusion receives further support from definitions of "value" used in other tax contexts.
¶ 24 Interpreting FMV so as to exclude sales tax also captures its legal, technical meaning, although, as the majority rightly observes, this meaning merely informs our analysis and does not control it. Majority at 347-48. To give an example, the Washington Pattern Jury Instructions define FMV in the context of eminent domain as:
6A Washington Practice: Washington Pattern Jury Instructions: Civil 150.08, at 76 (5th ed.2005); see also State v. Brown, 132 Wn.2d 529, 611-12, 940 P.2d 546 (1997) (courts must define "technical" terms used in jury instructions); State v. Rowley, 74 Wn.2d 328, 334, 444 P.2d 695 (1968). This instruction does not mention sales tax, nor can it realistically be argued that the amount of cash that a well-informed seller would accept includes sales tax. See supra p. 3. Thus, in both technical and ordinary usage, and to an average person purchasing insurance, FMV in an insurance contract such as Holden's clearly means the market price exclusive of sales tax.
¶ 25 Even if FMV standing alone in Holden's ACV coverage is ambiguous, which for the foregoing reasons it is not, it emphatically is not ambiguous when one considers the term in relation to the entirety of Holden's insurance policy. Holden paid an additional premium to supplement her basic ACV coverage with a replacement cost endorsement (RCE), which promised to reimburse her for "the full cost of repair or replacement" if she repaired or replaced damaged or destroyed items. Clerk's Papers (CP) at 118. Presumably, Holden did so because she did not believe she had such coverage under the ACV provision. The parties agree that the RCE included reimbursement for any sales tax paid as a result of repair or replacement. Yet, according to the majority's reading of FMV, the ACV provision already covered the full cost of repair or replacement, inclusive of sales tax, regardless of whether Holden actually replaced the property or incurred the tax.
¶ 26 It is difficult to understand why an insured who is eligible to receive the full replacement cost of insured items without actually replacing them would purchase a second insurance product reimbursing the full replacement cost only after replacement has occurred. But under the majority's interpretation of FMV, this is exactly what Holden did when she purchased the RCE to supplement her ACV coverage.
¶ 27 We give insurance contracts a "`practical and reasonable rather than literal interpretation', and not a `strained and forced construction' leading to absurd results." Eurick v. Pemco Ins. Co., 108 Wn.2d 338, 341,
¶ 28 As a final observation, the language of Holden's ACV coverage does not support the automatic award of sales tax to Holden, even if, despite the analysis above, sales tax is included in the compensation due under that provision, which reads:
CP at 99. Although the ACV clause includes the words "the amount necessary to repair or replace," one cannot in good faith rewrite the clause to read: "Covered loss to property will be settled at ... the amount necessary to repair or replace the damaged property." The reference to the cost of repair or replacement merely sets an upper limit on compensation owed under the ACV provision, not an automatic level of compensation.
¶ 29 Thus, even if the amount owed under the ACV provision includes sales tax, which it does not, the language of that provision does not suggest to the average insurance consumer that his or her loss will always be covered at replacement cost and therefore will always include sales tax. Contra majority at 347-48. Rather, the provision suggests that the amount disbursed cannot exceed that cost; it sets a ceiling, not a floor.
¶ 30 I would hold that Holden's ACV coverage cannot reasonably be interpreted so as to require payment of sales tax in addition to the market value of a loss. Indeed, Holden could not have understood the ACV provision in her policy to so require. The provision is neither susceptible to more than one reasonable interpretation nor ambiguous, and we therefore should not construe it in favor of the insured. This holding maintains consistency with the ordinary and technical meanings of the term "fair market value" (FMV), the definition of ACV under the policy, avoids redundancy in the two insurance products held by Holden, and comports with the language of the ACV policy provision itself. Because the majority dismisses these compelling considerations and erroneously concludes that Holden's ACV coverage includes payment for (unpaid) sales tax, I dissent.
WE CONCUR: GERRY L. ALEXANDER and SUSAN OWENS, Justices.
