Whenaninsuredpropertyownersuffersatotalloss,insuranceadjustersfrequentlyfindthemselvesembroiledinsettlementnegotiationsandattempttolimitthecompany’spayoutbycloselyassessingdamages.Whilethisassessmentplaysanimportantroleatthepre-lawsuitsettlementstage,itwarrantsstrategicadvocacyatthelitigationstage.
Considerthefollowingscenario.Twentyyearsago,WalterWindfallboughtabuildingfor$1milliontostarthislawfirm.Oneday,thebuilding,whichWalterhadinsured,burnstotheground.Likemanyinsurancepolicies,Walter’spolicyallowsrecoveryoftheactualcashvalue(ACV)ofhispropertybutdoesnotdefineACV.Walter’sappraisersaysthatreplacingthebuildingwillcost$3million.
UndertheFairMarketValueRule,currentlyusedin11states,1Walterwouldbeentitledtothedifferencebetweenthefairmarketvalueofthepropertybeforeandaftertheloss.Sincethepropertywasdestroyedentirely,applyingtheFairMarketValueRulewouldovercompensateWalterbecausehewouldbegaininganentirelynewbuildingwithamuchlongerusefullife.
Incontrast,undertheReplacementCostMinusDepreciationRule,usedin4states,2thereplacementcostisreducedbythelossintheproperty’sresidualvalue.Thus,ifattheendofits50-yearusefullife,thebuildingwouldhavehadaresidualvalueof$200,000,thebuilding’sdepreciation–thecostofthebuildingminustheresidualvalue($1million-$200,000)–wouldbe$800,000.ApplyingtheReplacementCostMinusDepreciationRule($3million-$800,000),itwouldcostWalter’sinsurancecompany$2.2milliontomakeWalterwhole.
WhilethisapproachseemssoundbecauseWalterisnotgettinganentirelynewbuilding,therearecircumstancesunderwhichthismethodwouldbeunfair.If,forexample,atthetimeofthefire,Walter’sbuildingwasobsolete–thatis,ifithadverylittlevaluetoWalterforpurposesofeitheruseorsale–$2.2millionwouldovercompensateWalter.Whenapplyingbothcalculations,itispossiblefortheinsuredtoendupinabetterpositionafterthelossthanbeforethelossand,thus,providesinsuredswithanincentivetocausealoss. Approximately20states3haveaddressedtheseissuesbyadoptingtheBroadEvidenceRule.TheBroadEvidenceRuleoriginatedintheseminalcaseMcAnarneyv.NewarkFireIns.Co.,159N.E.902(N.Y.1928)(explainedinSRInt’lBus.Ins.Co.v.WorldTradeCenterProps.,LLC,445F.Supp.2d320,342-45(S.D.N.Y.2006)),wheretheCourtheldthatallfactorsthatbearonthevalueofthepropertyshouldbeconsideredwhendeterminingthepaymentthatwouldrestoretheinsuredtothestatusquoante.Suchfactorsincludemarketvalue,replacementcost,depreciation,originalcost,conditionoftheproperty,location,use,assessedvalueandofferstosell.TheBroadEvidenceRuleisaninclusivevaluationmethodthatallowsanyevidencethatcanestablishcorrectpropertyvalue.Specifically,theRuleallowsanaccuratedeterminationofthelossincurredwithoutovercompensatinginsureds.AlthoughmanycourtshaveusedtheRulesincethen,courtsrefrainfromreferringtoadmissionofmoreexpansiveevidenceasdoingsounder“theBroadEvidenceRule.”Additionally,courtshavenotspecificallyenumeratedthefactorstobeconsideredundertheRule,orwhatweightshouldbegiventoeachfactor.
BothMarylandandVirginiahaveadoptedtheBroadEvidenceRule,whiletheDistrictofColumbiaandWestVirginiaremainundecided.TheMarylandCourtofAppealsheldthatthedeterminationof“costofproductionlessdepreciation”wasnottheonlyfactorinACVanalysis.Rather,itwasmerelyoneamongothersourcesofevidence.Schreiberv.PacificCoastFireIns.Co.,75A.2d108,111(Md.1950).Sincethen,Marylandcourtshaveroutinelyconsideredseveralfactorscontributingtothedeterminationofdamages.Forexample,inFredFrederickMotors,Inc.v.Krause,12Md.App.62(Md.1971),theCourtofSpecialAppealsrejectedthedeterminationthatacardealer’srecoverywaslimitedtothecostofrepairsofthedamagedcarsandheldthat“ifaplaintiffcanprovethatafterrepairshisvehiclehasadiminishedmarketvaluefrombeinginjured,thenhecanrecoverinadditiontothecostofrepairsthediminutioninmarketvalue,providedthetwotogetherdonotexceedthediminutioninvaluepriortotherepairs.”
Likewise,VirginiaadoptedtheBroadEvidenceRulein1961,wheninanactiontorecoverunderaninsurancepolicyforwindstormdamagetoproperty,thecourtheldthatreplacementorreproductioncosts,lessdepreciation,wasanimportantfactorindeterminingACV.Harperv.PennMut.FireIns.Co.,199F.Supp.663,665(E.D.Va.1961)(applyingVirginialaw).TheCourtreasonedthat“strictadherencetoeitheroftherecognizedtestsof‘marketvalue’or‘reproductioncostlessdepreciation’willmerelyservetoshacklethetrieroffactinallcases.”
Giventhestateofthelaw,insurersshoulddefineACVintheirpoliciesbyincorporatingfactorscourtshaveconsideredundertheBroadEvidenceRule.Thisapproachpreventsovercompensationandprovidesadjustersandtheirattorneysbargainingpoweratboththesettlementandlitigationstages.IfapolicylacksanACVdefinition,attorneyspracticinginBroadEvidenceRulejurisdictions,likeMarylandandVirginia,shouldseekadmissionofrelevantevidencetoaccuratelydeterminedamages.AttorneysinundecidedjurisdictionsshouldcitetoneighboringjurisdictionsandadvocatefortheRule’sadoption.
1) Alabama, California, Delaware, Georgia, Maine, Missouri, Nebraska, New Mexico, North Dakota, Texas, and Washington.
2) Illinois, Louisiana, Ohio, Oregon.
3) Colorado, Connecticut, Florida, Idaho, Indiana, Iowa, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Montana, New Hampshire, New Jersey, New York, North
Carolina, Oklahoma, Rhode Island, South Carolina, South Dakota, Vermont, Virginia, Wisconsin.