Actual Cash Value and Indemnity

The concept of actual cash value in relation to indemnity is an important study for anybody analyzing what is owed under a property insurance policy. This post follows yesterday’s discussion about the Indiana Supreme Court case,1 noted in What Does Indemnity Mean in the Context of Actual Cash Value? The Indiana Supreme Court ruled that Indiana would adopt the broad evidence rule to determine actual cash value. It stated that replacement cost less depreciation could be considered.

So, how did this impact the value of the case, and how is the broad evidence rule applied? The court noted the evidence and did not disturb the jury’s verdict:   

Plaintiff testified that the value of the house immediately before the fire was at least $15,000.00 and that immediately after the fire it was $5,000.00, thus fixing the loss at $10,000.00. She also presented an expert witness who testified that the damage to the house was $8500.00, based upon the estimated cost of necessary repairs.

Defendant’s evidence was that the estimated cost of repairs was $8729.00 but that the house was 50% depreciated, due to its age. It further gave evidence that its initial offer was incorrect and arose from erroneously applying the extended coverage endorsement terms to the damaged house, hence the alternative offer to pay a greater amount if the premises were restored. It further gave evidence that after the dispute arose, it increased its offer by applying a 25% factor, in an effort to ‘keep everybody satisfied.’

Under the broad evidence rule, the parties were entitled to introduce evidence of ‘every fact and circumstance which would logically tend to a formation of a correct estimate of the loss.’…under the evidence presented, the jury was at liberty to award as much as $10,000.00, based upon Plaintiff’s before and after valuation or as little as $4,250.00, based upon her expert’s testimony of repair costs of $8,500.00 and a depreciation factor of 50%, as presented by Defendant’s evidence.

In its analysis adopting the broad evidence standard, the court noted four different methods for determining actual cash value in a partial loss situation:

Replacement cost, without deduction for depreciation.  
The market value test.
The replacement cost with deduction for depreciation
Broad Evidence Rule

The court analyzed the four tests and then approved the broad evidence rule. Regarding the broad evidence rule, the court stated:

In New Jersey the 1943 New York Form had been adopted by statute. The ‘replacement cost extended coverage endorsement”, approved for use in Indiana by the Indiana Insurance Commission, had also been expressly approved in New Jersey, by statute. The Supreme Court of New Jersey expressly held that these provisions, when considered together, prohibited an award simply based on replacement cost without consideration for depreciation where the policy covered only actual cash value and not replacement cost. It did not, however, say that the amount constituting actual cash value was necessarily equal to the cost of repair less deduction for depreciation. Instead it adopted the Broad Evidence Rule. It is a significant and scholarly opinion. It is a unanimous opinion. It reviews in detail the interplay between actual cash value coverage and replacement cost insurance. It specifically considers the fixed measures of replacement cost, market value, and replacement cost less depreciation. It expressly considers the problem of total loss and partial loss, the effect of over and under insurance, and the applicability of principles of valuation to both old and new structures.

After a thorough analysis of the problems inherent in all of the standards for determining actual cash value, the court expressly adopted the Broad Evidence Rule quoting it from McAnarney, supra, as follows:

‘ ‘Where insured buildings have been destroyed, the trier of fact may, and should, call to its aid, in order to effectuate complete indemnity, every fact and circumstance which would logically tend to the formation of a correct estimate of loss. It may consider original cost and cost of reproduction; the opinions upon value given by qualified witnesses; the declarations against interest which may have been made by the insureds; the gainful uses to which the buildings might have been put, as well as any other fact reasonably tending to throw light upon the subject. 159 N.E. at 905.’ ‘

‘McAnarney was intended to insure application of the principal of indemnity (i.e., to make the measure of recovery for fire insurance losses correspond to the actual pecuniary loss sustained by the insured’)….  Under valuation denies the insured the indemnification due him under the policy. Over valuation tempts the insured to cause the very loss covered, or at least, to provide inadequate safeguards against the loss….

‘The commentator’s generally view the broad evidence rule with approval. See Id. at 898–899 (a flexible test which can be modified in such a way as to accord more nearly with the principal of indemnity); Cozen… 12 Forum at 657 (Sacrificing an easily applied standard for a far more equitable result). It has been adopted in numerous jurisdictions.’

‘We find the rationale of the broad evidence rule to be compelling. It requires the fact-finder to consider all evidence an expert would consider relevant to an evaluation, and particularly both fair market value and replacement cost less depreciation. If the appraiser finds it appropriate under the particular circumstances he may, after weighing both factors, settle on either alone.’…

This is a sound rule of law…

The concept of indemnity—putting the insured in the same place before the loss as after the loss—was discussed and shown to be a much more difficult problem to solve.  The first three tests could either overcompensate the policyholder or undercompensate the policyholder by leaving the policyholder better or worse off after the loss.  Accordingly, the court adopted a standard allowing the parties to present all three tests and whatever other evidence would tend to indemnify the policyholder.

The important point is that actual cash value and replacement cost can properly result in the same amount under the broad evidence rule. Replacement cost can equal actual cash value. This point is which is increasingly forgotten.

Thought For The Day  

Details matter, it’s worth waiting to get it right.

—Steve Jobs    

1 Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349 (Ind. 1982).