Calculating Actual Cash Value, Part 26: Montana

Shane Smith | Property Insurance Coverage Law Blog | July 5, 2017

In Montana, a jury may consider all relevant evidence when determining the actual cash value of the property damaged or destroyed.1 Under the broad evidence rule, the trier of fact “may consider any evidence logically tending to the formation of a correct estimate of the value of the insured property at the time of the loss.”2

Where a policy limits the insurer’s liability to the actual cash value at the time of the loss, what constitutes actual cash value depends upon the nature of the property insured, its condition, and other circumstances existing at the time of loss.3

Depreciation because of age should be considered in determining the actual cash value of a building partially destroyed by fire.4

However, although not expressly rejecting the use of depreciation based on the age of a building partially destroyed by fire in arriving at its sound value before the fire, the court in McIntosh v. Hartford Fire Insurance Company,5 did not use a depreciation percentage in further determining the amount of liability of the defendant insurance companies. The record showed that the buildings had been insured under policies which provided “against all direct loss or damage by fire. . .” and also that the company “shall not be liable beyond the actual cash value of the property at the time any loss or damage occurs, and the loss or damage shall be ascertained or estimated according to such actual cash value, with proper deduction for depreciation however caused, and shall in no event exceed what it would then cost the insured to repair or replace the same with material of like kind and quality.” The insurance companies argued that where the buildings had depreciated 48%, the cost of repairing them using new materials should likewise be depreciated by the same percentage in fixing the amount of liability of the companies. The court held that under the state statute, Mont. Code Ann. § 33-24-101, where there was no valuation in the policy, the measure of indemnity in insurance against fire is the expense, at the time that the loss is payable, of replacing the thing lost or injured, in the condition in which it was at the time of injury, and that since no valuation of the property insured was included in any of the policies the statute was incorporated into them. The court reversed and remanded with directions to enter judgment against the insurance companies for an amount equal to the full cost of repairing the building using new materials where necessary to restore it to the condition it was in before the fire.
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1 CQI, Inc. v. Mountain W. Farm Bureau Ins. Co., No. CV 08-134-BLG-CSO, 2010 WL 2943143, at *2 (D. Mont. July 21, 2010).
2 Id.citing Interstate Gourmet Coffee Roasters, Inc. v. Seaco Ins. Co., 59 Mass. App. Ct. 78, 794 N.E.2d 607, 611 (Mass. App. Ct. 2003).
3 Century Corp. v. Phoenix of Hartford, 157 Mont. 16, 482 P.2d 1020 (1971).
4 Lee v. Providence Washington Ins. Co., 82 Mont. 264, 266 P. 640 (1928).
5 McIntosh v Hartford Fire Ins. Co., 106 Mont. 434, 78 P.2d 82 (1938).

Ninth Circuit Holds That Despite ‘Known Damage’ Exclusion Insurer Had Duty Under Oregon Law to Indemnify and Defend Contractor When Property Damage Resulted From Contractor’s Negligent Repair of a Prior Negligent Act

Alex Corey | Constructlaw | June 22, 2017

Alkemade v. Quanta Indem. Co., 2017 U.S. App. LEXIS 6896 (9th Cir. Apr. 20, 2017)

In 1994, Adrianus and Rachelle Alkemade (the “Alkemades”) bought a house from Meltebeke Built Paradise Homes (“Meltebeke”). The home was built on expanding soils, causing significant structural damage.  Meltebeke repaired the existing damage and hired an engineering firm to install a helical pier foundation, which would have prevented any further damage to the home.  However, the helical pier foundation was also installed negligently, afflicting the home with the same type of structural damage as before.

Alkemades sued Meltebeke for negligent supervision of the helical piers installation. Meltebeke entered a settlement agreement with Alkemades in which Meltebeke assigned to Alkemades the right to sue its insurers, Quanta and GFIC, who refused to defend Meltebeke on grounds that its knowledge of the damage caused by the original, defective construction prevented coverage under a known damages provision in Meltebeke’s policies (the “Policies”).  Alkemades subsequently sued the issuers for breach of contract in the U.S. District Court for the District of Oregon for their failure to defend and indemnify Meltebeke.  The insurers moved for summary judgment.

The Policies excluded coverage for damage known by the insured, in whole or in part, that occurred before the policy period began. If such damage was known to the insured, then any “any continuation, change or resumption” of that damage was also deemed known, and excluded.  

The insurers argued that “the helical piers were simply one more in a long line of unsuccessful attempted remedial fixes to the known property damage resulting from expanding soils.” In other words, the property damage sustained after the installation of the helical piers was a “continuation, change, or resumption” of the previously known property damage.  Therefore, the known damages provisions excluded coverage.  The District Court found this interpretation reasonable and granted summary judgment for the insurer’s favor.

On appeal, Alkemades argued that damage caused by Meltebeke’s first negligent act does not “continue, change or resume” when later damage is sustained after a repair that would have fixed the problem absent a second negligent act. The Ninth Circuit evaluated Alkemades’ argument in light of Oregon law, which provides that if the insured offers a competing plausible and reasonable interpretation of the policy, that interpretation governs regardless of whether the insurer offers a different interpretation that is also plausible and reasonable.

The Ninth Circuit reasoned that the Policies’ phrase “continuation, change, or resumption” modified “damage previously known,” a reasonable interpretation is that both the previously known damage and the later damage must share a cause. Because it was possible that the later damage was due to the negligently installed helical pier, and not the original negligent construction, the Court determined that it was plausible to treat the later damage separately.

In California, Can an Insured Homeowner Recover Full Replacement Cost by Purchasing a Home at Another Location?

Stephanie Poll | Property Insurance Coverage Law Blog | June 25, 2017

The short answer is yes. In Conway v. Farmers Home Mutual Insurance Company, the California Court of Appeal followed several out-of-state authorities in considering the issue and ruling in favor for the insured.1 Chip Merlin raised this issue with respect to Texas back in 2009 – finding that the courts there apply the law a bit differently. You can revisit the blog here: Obtaining Full Replacement Cost Benefits Through Replacement at a Different Location – Texas Style.

In Conway, the plaintiffs purchased a house in Imperial Beach, California, paying $230,000 for the home and subsequently renting it out to tenants. They also obtained $100,000 in fire insurance on the property from Farmers Home Mutual Insurance Company (Farmers). The home was damaged by fire and although it could have been replaced, the Plaintiffs decided not to make any repairs because they believed it made more economic sense to develop the subject parcel in conjunction with development of an adjacent parcel they owned. So instead of repairing the damage within months of the fire, they paid $230,000 for another single-family home in Imperial Beach. After disagreements as to the value the insureds were entitled to, Farmer’s paid the actual cash value and refused to pay the replacement value of the loss.

The policy Farmers issued to Plaintiffs was pretty straightforward, promising that in the event of a fire at the insured premises, Farmers would pay for: “c. Buildings under Coverage A or B at replacement cost without deduction for depreciation…”2 Plaintiffs argued that the policy placed no restriction on where an insured may replace a damaged building.

Conway was a case of first impression in California, however the appellate court considered the other states that found replacement costs can include purchase of another building at a different location, namely Connecticut, Alabama, Michigan, New Jersey, New York, Maine, and Washington.3

The court noted in particular, that in the case of Hess v. North Pacific Insurance Company out of Washington, the policy there had standard limitations on the recovery of replacement costs identical to the ones in the Farmer’s policy in Conway. Quoting Hess the court noted,

[T]he insured desires to rebuild either a different structure or on different premises. In those instances, the company’s liability is not to exceed what it would have cost to repair an identical structure to the one lost on the same premises. Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds.4

In rejecting Farmer’s arguments and analyzing the definition of “replace,” the court held,

The dictionary definition does not draw any distinction between what can be repaired and what cannot be repaired. More importantly, although the term replace certainly includes rebuilding on the same premises, the term also includes the notion of substituting for an original item another item which serves the same function as the original but is different in nature from the original. The broader and widely accepted meaning would certainly encompass the purchase of another house at a different location. Thus at best, Farmers can only contend there is an ambiguity in the policy with respect to the limitations on replacement of a damaged home…Because the ordinary and popular use of ‘replace’ includes the purchase of a replacement dwelling at another location and no other provision of the policy alerts the insured to a narrower limitation on payment of replacement costs, Farmers’ argument brings us to the rule which requires that ambiguities are to be resolved in favor of the insured.5

Therefore, it is important to carefully review all fire insurance policies for any limitations with respect to replacement costs. But absent such limitations, obtaining full replacement cost benefits by replacement at a different location is allowable under California law.
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1 Conway v. Farmers Home Mutual Ins. Co., 26 Cal.App.4th 1185 (1994).
2 Conway, at 1188.
3 (See, e.g.S and S Tobacco v. Greater New York Mut. 224 Conn. 313 (1992); Huggins v. Hanover Ins. Co. 423 So.2d 147, 150 (Ala.1982); Smith v. Michigan Basic Property Ins. Assn. 441 Mich. 181, (1992); Ruter v. Northwestern Fire & Marine 72 N.J.Super. 467, 471–473 (1962); Johnson v. Colonial Penn Ins. Co. (1985) 127 Misc.2d 749, 751–752, 487 N.Y.S.2d 285; Blanchette v. York Mut. Ins. Co. (Me.1983) 455 A.2d 426, 427–428; see also Hess v. North Pacific Ins. Co. (1993) 122 Wash.2d 180, 859 P.2d 586, 588).
4 Conway, 26 Cal.App.4th at 1190 (citing Hess, 859 P.2d at 587).
5 Conway, at 1191-92.

Water Damage Loss Time Limits and Hidden Damage—What Do Insurers Promise to Departments of Insurance?

Chip Merlin | Property Insurance Coverage Law Blog | June 26, 2017

I spoke about water damage loss at the National Association of Public Insurance Adjusters Annual Convention last week. One issue I discussed was the time limits of water damage. A recent post, Avoiding Denials of Water Damage Claims Based on “Long Term Damage Exclusions” also discussed the issue.

Following my presentation, Lorinda Mikesell, the Vice President of the Texas Association of Public Adjusters, asked whether such time frames are effective when water damage is hidden.. Lorinda said that at least one insurer promised to cover water damage despite the time limitation if the loss was hidden, and she sent me the following Texas Department of Insurance Order which stated:

“USAA has indicated how it intends to adjust a covered water claim if mold is present on the damaged covered property. USAA has represented to the Department that even though its Homeowners policy and Condominium Unit Owners policy excludes loss caused by or consisting of mold, mold is necessarily removed or treated in the process of repairing damage resulting from a covered water loss. Mold that is present upon water damaged materials will be removed in the course of repairing the covered water loss. Expenses which are related solely to the existence of mold are the only expense which would not be covered in the course of repair of a covered water damage claim. In addition, notwithstanding the exclusion for constant repeated seepage or leakage of water or steam over a period of weeks, months, or years, USAA agrees to cover the cost of reasonable and necessary repair of direct physical damage to the dwelling or property caused by a covered water loss that is hidden or undetected and the associated direct physical damage consisting of mold, fungi, or other microbial damage to the dwelling or property, provided the insured reports the loss within thirty days of the date the damage was or should have been detected. This would not cover the cost of remediation, testing, loss of use, or debris removal. Remediation means to treat, contain, remove, or dispose of mold, fungi, or other microbes beyond that which is required to repair or replace the covered property physically damaged by water or steam.”

(Emphasis added)

I often say that I learn more when speaking at conferences than an audience may learn from my presentation. I was not aware of this “promise” by USAA, and I am thinking of how we may ask insurers in discovery for similar filings with Departments of Insurance that explain the language used in policies. I wonder if USAA has this promise explained in writing to their claims adjusters.

Depreciation of Labor Costs When Determining Actual Cash Value: Henn v. American Family

Alycen A. Moss | Property Insurance Law Observer | June 20, 2017

In February, the Nebraska Supreme Court held that it is acceptable for insurance companies to depreciate labor costs when determining the actual cash value (ACV) of damaged property, even when the insurance policy does not define “actual cash value” or “depreciation.” See Henn v. American Family Mutual Insurance Co., 295 Neb. 859 (Neb. 2017). Writing for the Nebraska Supreme Court, Chief Justice Michael Heavican concluded that all relevant facts and evidence should be used to calculate ACV, and both materials and labor constitute relevant facts to consider when establishing the value of property prior to the loss.

The case dates back to a September 2011 dispute when Rosemary Henn filed a homeowner’s claim with American Family due to damage to her home’s roof vent caps, gutters, siding, fascia, screens, deck, and air-conditioning unit during a hailstorm on August 18, 2011. American Family determined that Henn’s insurance policy covered the damaged property.

American Family’s policy provided that, following a covered loss, an insured may recover “the cost to repair the damaged portion or replace the damaged building, provided repairs to the damaged portion or replacement of the damaged building are completed,” or “[i]f at the time of loss, … the building is not repaired or replaced, [American Family] will pay the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building.”  Under both options, the insured would first receive an actual cash value payment.  The policy, however, did not define “actual cash value” or “depreciation.” The policy also did not describe the methods employed to calculate “actual cash value” or explain how American Family determined the difference between replacement cost value and ACV.

After inspecting the storm damage, American Family paid Henn the ACV for the damaged property and provided Henn with a written estimate that explained the calculations for replacement cost value, actual cash value, and depreciation.  The estimate defined “actual cash value” to be “based on the cost to repair or replace the damaged item with an item of like kind and quality, less depreciation.” The estimate further stated “replacement cost” was the “cost to repair the damaged item with an item of like kind and quality, without deduction for depreciation.” In the estimate, American Family’s adjuster determined the cost to repair and replace the damaged portions of Henn’s home, and it subtracted depreciation of both the materials and labor. The estimate did not specify which portion of depreciation derived from materials and which portion derived from labor.

Henn did not make a claim for payment of replacement costs, but instead, filed a lawsuit in Nebraska state court.  American Family removed the case to the U.S. District Court for the District of Nebraska on diversity grounds, and filed a motion for summary judgment. The District Court held the motion in abeyance until the Nebraska Supreme Court could answer the following certified question: “May an insurer, in determining the ‘actual cash value’ of a covered loss, depreciate the cost of labor when the terms ‘actual cash value’ and ‘depreciation’ are not defined in the policy and the policy does not explicitly state that labor costs will be depreciated?”

The Nebraska Supreme Court looked to other jurisdictions for clarity on the proper calculation of ACV, primarily the Oklahoma Supreme Court’s split decision in Recorn v. State Farm, 55 P.3d 1017 (Okla. 2002). In Recorn, the majority reasoned that depreciation of labor logically factored into the ACV determination because a building is a product of both labor and materials. The dissent argued that labor, like all services, does not logically depreciate, and that a roof, for example, is not an integrated product, but a combination of a product (shingles) and a service (labor to install). Other states discussed Recorn at length. The Supreme Court of Arkansas and the U.S. District Court for the Eastern District of Kentucky sided with Recorn’s dissent, arguing that labor does not logically depreciate. However, the U.S. District Court for the Western District of Pennsylvania and the Florida District Court of Appeals sided with Recorn’s majority. Furthermore, in Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349 (Ind. 1982), the Indiana Supreme Court described the broad evidence rule as a “flexible approach” accounting for “every fact and circumstance which would logically tend to a formation of a correct estimate of the loss.”

Armed with case law from within and outside of the court’s jurisdiction, the Nebraska Supreme Court ruled that ACV unambiguously includes labor depreciation under the broad evidence rule because both materials and labor constitute relevant facts to consider when establishing the value of property prior to the loss. The Court reasoned that ACV is not a measure of damages, but rather, it is only intended to provide a depreciated amount of the replacement costs to start the repairs.

Yet, as the case law discussed in Henn demonstrates, different states take different approaches to this issue. For example, in a 2015 case from Arkansas, Shelter Mutual Ins. Co. v. Goodner, 477 S.W.3d 512 (Ark. 2015), held that labor cannot depreciate: “The shingles are of course logically depreciable. As they age, they certainly lose value due to wear and tear…. Labor, on the other hand, is not logically depreciable. Does labor lose value due to wear and tear? Does labor lose value over time? What is the typical depreciable life of labor? Is there a statistical table that delineates how labor loses value over time? I think the logical answers are no, no, it is not depreciable, and no. The very idea of depreciating the value of labor is illogical…”

So, when dealing with calculation of ACV, we must be aware of our jurisdiction. Different states have come to different conclusions on the issue, with no obvious answer as to why a state chooses one policy over the other. When paying ACV, an insurer must be aware of whether the state allows labor depreciation in the calculation, lest an insurer faces litigation like American Family. This is an issue to watch for the future, as states will likely produce more case law on the calculation of ACV in coming years.