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.
_________________
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).

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.

Does Actual Cash Value Mean Fair Market Value or Replacement Cost minus Depreciation?

Kevin Pollack | Property Insurance Coverage Law Blog | June 4, 2017

What is an insured, who has an “actual cash value” property insurance policy, entitled to recover when their property is damaged, but not a total loss? Is the insured entitled to the cost to repair/replace the property minus depreciation? Or is the insured’s recovery limited to the property’s fair market value? What if the property’s fair market value of the property at the time of the loss is far less than the amount of money it will take to repair the property minus depreciation?

The California Court of Appeal, recently dealt with these issues in California Fair Plan Association v. Garnes.1 In Garnes, the insured’s home was damaged by a kitchen fire. At the time of the loss, the property was insured by California Fair Plan on an actual cash value basis, had a policy limit of $425,000, and had a fair market value of only $75,000.

The California Fair Plan insurance policy contained a paragraph entitled “Loss Settlement,” which stated that Fair Plan would pay the following amounts for losses to the insured’s dwelling:

(1) Total Loss: If the greater of the cost either to reconstruct or replace the damaged part of the property exceeds the actual cash value before the loss of all covered property …, we will pay such actual cash value.

(2) Partial Loss: In the cases of losses that are not described in (1) above, we will pay the least of the following amounts: [¶] (a) The lower of the cost either to reconstruct or replace the damaged part of the property, less a reasonable amount for depreciation; or [¶] (b) The actual cash value before the loss of the damaged property.

The policy defined “actual cash value” of property to mean “its fair market value.”

The insured argued that she should be able to recover the amount it would cost to repair the house, less an amount for depreciation, the net amount of which was agreed to be $320,549. California Fair Plan disagreed and argued that the insurance policy and the California Insurance Code allowed it to pay the lesser of that amount or the fair market value of the house, which at the time of the fire was $75,000. California Fair Plan argued the loss was a “total loss” because the cost to repair the property exceeded its fair market value. The insured, however wished to rebuild the property because it had not been destroyed and based on its sentimental value to her family.

The trial court agreed with California Fair Plan and granted its summary judgment motion, finding California Fair Plan needed to only pay $75,000—the fair market value of the property at the time of the loss.

The insured appealed.

The court of appeal first examined Insurance Code section 2051:

Section 2051 sets forth the “measure of indemnity in fire insurance” for an open ACV policy…. In the case of a “total loss to the structure,” recovery is limited to the lesser of the policy limit or a property’s “fair market value.” (§ 2051, subd. (b)(1).) In the case of “partial loss to the structure,” however, recovery is not limited to fair market value; instead, it is the lesser of the policy limit or “the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its conditions at the time of the injury.” (§ 2051, subd. (b)(1).) Under subdivision (b)(2), it is clear that in the case of “partial loss to the structure,” the insured is entitled to repair, rebuild or replace that which was lost or injured. While such recovery is reduced by a deduction for physical depreciation and may not exceed the policy limit, nothing in subdivision (b)(2) or the remainder of section 2051 indicates that the policyholder is limited to the fair market value of the property or any part of it.

(Emphasis added.)

Based on the language of the statute and the fact that the insured’s property was not totally destroyed, the appellate court concluded that the insured’s claim was for a “partial loss to the structure” (not a total loss) and that, under Insurance Code section 2051, she was therefore entitled to recover the amount it would cost her to repair, rebuild, or replace the damaged property less a fair and reasonable deduction for physical depreciation based upon its conditions at the time of the injury.

California Fair Plan then argued, that despite the Insurance Code’s language, its policy, not the insurance code, controlled the outcome, and because its policy defined actual cash value as fair market value, and because its policy gives the insurer the option to pay the lesser of the amount to repair the property minus depreciation or the fair market value, it was only required to pay the insured $75,000.

The court disagreed, and held that where an insurance policy’s terms violate the insurance code, the insurance code controls. Its rationale on this issue was:

The parties also dispute whether the Policy is to be applied in accordance with its terms or instead in accordance with the Insurance Code. FAIR argues that regardless of whether the Policy complies with the governing Insurance Code provisions, this case and its obligations to Garnes are “governed by the policy she purchased, not by some statutory form policy she never purchased.” Garnes relies on Century–National Ins. Co. v. Garcia (2011) 51 Cal.4th 564, 120 Cal.Rptr.3d 541, 246 P.3d 621 (Century–National) for the proposition that “a fire insurance policy that offers less coverage than the standard form (Insurance Code § 2071) is invalid,” and “that insurers may not provide less coverage than appears in the form fire policy set forth in § 2071.”

[W]here California’s statutory or decisional law require coverage, an insurer may not circumvent the law by employing contrary contract terms…[W]here an insurer’s policy contains terms that conflict with the law, the courts will decline to enforce the impermissible terms and read into the policy the terms required by statute.

The court ruled that “since mandatory insurance coverage provisions are incorporated into every policy to which they pertain, section 2051 is incorporated into the standard form policy set forth in section 2071, as indicated by case law, regulation and statute.”

Consequently, the court determined that California Fair Plan’s provisions seeking to limit an insured’s recovery for a partial loss to a structure to the property’s fair market value was unenforceable because such provisions were in direct conflict with Insurance Code section 2051.
_________________
1 California Fair Plan Ass’n v. Garnes, No. A143190, 2017 WL 2303165 (Cal. Ct. App. May 26, 2017).

Repair Cost Exceeding Actual Cash Value Does Not Establish “Total Loss” Under Fire Insurance Policy

Christopher Kendrick and Valerie A. Moore | Haight Brown & Bonesteel LLP | May 31, 2017

In California FAIR Plan Assn. v. Garnes (No. A143190, filed 5/26/17), a California appeals court ruled that “total loss” under Insurance Code section 2051 refers to physical damage or loss, not the economic fact that the cost of repair exceeds the actual cash value of a home. Thus, where the home is not physically destroyed, the insured is entitled to the actual cost of repair, minus depreciation, even if that amount exceeds the fair market value of the home.

In Garnes, the insured had a fire policy issued by the California FAIR Plan with limits of $425,000. It was agreed that the assessed value of the insured home was only $75,000. The insured suffered a kitchen fire with estimated repair costs of $320,000. The FAIR Plan declared the home a total loss because the cost of repair exceeded the home’s value, and offered to pay the actual cash value as provided by Insurance Code section 2051(b)(1).

Section 2051 of the Insurance Code provides that under an open fire insurance policy (where the ultimate value of the property is not agreed in advance but left “open”) that pays “actual cash value,” as did the FAIR Plan policy, the “measure of the actual cash value recovery . . . shall be determined” in one of two ways, depending on whether there has been a “total loss to the structure” or a “partial loss to the structure.” In case of total loss to the structure, the amount payable is the “policy limit or the fair market value of the structure, whichever is less.” For a “partial loss to the structure,” the measure prescribed is “the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation” or “the policy limit, whichever is less.” (Ins. Code, §§ 2051(b)(1); (b)(2).)

The Garnes policyholder argued that she had only suffered a partial loss and was therefore entitled under section 2051(b)(2) to the lesser of the policy limit, or the cost to repair or replace less depreciation. The appeals court agreed: “Construed in accord with its plain meaning, this provision, coupled with sections 2070 and 2071, sets a minimum standard of coverage that requires FAIR to indemnify Garnes for the actual cost of the repair to her home, minus depreciation, even if this amount exceeds the fair market value of her home.”

The court said that the insurance statutes should be construed “to ascertain and effectuate legislative intent,” looking first to the statutes’ words. According to the court, section 2051 “plainly refers to physical, rather than economic loss.” “Contrary to FAIR’s policy definition, which defines ‘total loss’ and ‘partial loss’ by reference to economic considerations (whether the cost to repair exceeds the property’s fair market value), section 2051 differentiates between the degree of loss ‘to the structure,’ and it prescribes two different measures of actual cash value depending on whether the loss to the structure is ‘total’ or ‘partial.’”

The court pointed out that the FAIR policy actually (and impermissibly) provided for situations where the economic loss exceeded the actual cash value, when the Legislature had included no such language in the statute. The Garnes court rejected the FAIR Plan’s reliance on Insurance Code section 2071 and Jefferson Ins. Co. v. Superior Court (1970) 3 Cal.3d 398, for the proposition that “if the cost to repair or replace the damaged property is more than its fair market value, then, according to the plain language of section 2071, there is no coverage for the repair or replacement cost to the extent it exceeds the actual cash value of the property.” The Garnes court stated:

“FAIR’s reliance on Jefferson overlooks one thing: the case involved a standard form policy that was part of an earlier statutory regime. In 2004, 34 years after Jefferson was decided, the Legislature adopted the current version of section 2051, which prescribes the method for determining (and therefore the meaning of) ‘actual cash value’ for purposes of determining the insurer’s indemnity obligation under an open fire insurance policy. Thus, while in 1970, the Jefferson court interpreted ‘actual cash value’ as used in section 2071 to mean ‘fair market value,’ in 2004 the Legislature adopted a more specific and mandatory measure of ‘actual cash value’ in a closely related section of the Insurance Code, section 2051…. To continue to interpret the language ‘actual cash value’ in section 2071 to mean fair market value in the face of section 2051’s specific definitions of that phrase would run contrary to the general presumption that a word or phrase used in a particular sense in one part of a statute is intended to have the same meaning if it appears in another part of the same statute.”

The Garnes court then engaged in a detailed analysis to conclude that both the Legislative history and the Insurance Commissioner’s own interpretations supported the policyholder’s arguments.

The court also addressed the perceived conflict with Insurance Code section 2051.5, granting insurers authority to withhold a portion of replacement cost coverage until completion of repair. FAIR Plan argued that “Had Garnes purchased a replacement cost policy … she would have been entitled to the amount needed to rebuild, repair or replace the damaged property only upon showing that she had made those repairs.” But under Garnes’ interpretation of the statute, “she would be entitled to replacement cost recovery without having to first repair the property or to otherwise comply with section 2051.5(a).”

The Garnes court saw no problem: “[U]nder a replacement policy that requires repair, rebuilding or replacement, the owner is entitled to actual cash value in the same amount as an ACV policyholder, at the outset, but in addition, is entitled to the difference between actual cash value and full indemnity (replacement costs without depreciation) at the conclusion of repair or rebuilding. There is no anomaly in this result.”

The Garnes court then went on to conclude that to the extent the FAIR Plan policy could be interpreted as affording less coverage than provided by Insurance Code section 2051, it was unenforceable as a matter of public policy.

Are Insurers Required to Pay Overhead and Profit for Payments Made on Actual Cash Value Basis?

Kevin Pollack | Property Insurance Coverage Law Blog | May 1, 2017

A recent class action lawsuit filed in Pennsylvania1 raised an issue that policyholder advocates and public adjusters see all over the country – insurers that try to exclude overhead and profit from property damage claim payments made on an actual cash value basis.

The named plaintiffs had replacement cost insurance policies with the following language:

Actual cash value- means the reasonable replacement cost at time of loss less depreciation for both economic and functional obsolescence.

5. How We Settle Covered Loss.

( 1) Settlement for covered loss or damage to the dwelling or separate structures will be settled at replacement cost, without deduction for depreciation, for an amount that is reasonably necessary, for the lesser of repair or replacement of the damaged property
….
When the cost to repair or replace damaged property is more than $2,500, we will pay no more than the actual cash value of the loss until actual repair or replacement is completed.

e. General contractor fees and charges will only be included in the estimated reasonable replacement costs if it is reasonably likely that the services of a general contractor will be required to manage, supervise and coordinate the
repairs. However, actual cash value settlements will not include estimated general contractor fees or charges for general contractor’s services unless and until you actually incur and pay such fees and charges, unless the law of your state requires that such fees and charges be paid with the actual cash value settlement.

(Emphasis added).

The case involved a situation where the plaintiffs had not yet completed the construction repairs at the time they received their ACV payments. Therefore, the insurer argued that it was not responsible to include overhead and profit in the payments because they were made on an actual cash value basis and that its policy explicitly excluded overhead and profit payments for general contractors when payments are made on ACV basis.

The policyholders disagreed, and argued that the general contractor overhead and profit exclusion was ambiguous because of its use of the term “replacement cost” as a component of “actual cash value” and that the provision was contrary to Pennsylvania law and unenforceable.

The court agreed with the policyholders and ruled in their favor. The court’s ruling specified that:

Insurance companies are required in Pennsylvania to include general contractor overhead and profit in actual cash value payments for losses where repairs would be reasonably likely to require a general contractor…. [This reflects] the majority approach across jurisdictions. (see Mills v. Foremost Ins. Co, 5 I I F.3d 1300, 1306 (II th Cir. 2008) (“A majority of courts considering the question under similarly drafted insurance policies has determined that an actual cash value payment includes a general contractor’s overhead and profit charges in circumstances where the policyholder would be reasonably likely to need a general contractor in repairing or replacing the damaged property in issue”); Goffv. State Farm Florida Ins. Co., 999 So. 2d 684, 689 (Fla. Dist. Ct. App. 2008) (“Actual cash value includes overhead and profit where the insured is reasonably likely to need a general contractor for repairs.”); Salesin v. State Farm Fire & Cas. Co., 229 Mich. App. 346, 368-69, 581 N. W .2d 781, 791-92 (1998) (“it is also true Sales in has paid a premium for a full replacement cost policy. There is no logical reason. nor any reason based upon the insurance policy itself or the record below, for deducting estimated contractor’s overhead and profit”); Tritschler v. Allstate Ins. Co., 213 Ariz. 505, 514, 144 P.3d 519, 528 (Ct. App. 2006), as corrected (Dec. 19, 2006) (“Several other jurisdictions have since followed the reasoning in Gilderman and Salesin and ruled that an insurer may not automatically deduct a contractor’s overhead and profit from an actual cash value payment.”); Mazzocki v. State Farm Fire & Cas. Corp., 766 N. Y.S.2d 719, 721 (App. Div. 3d Dep’t 2003) (“we find that the term “replacement cost”-as opposed to “actual replacement cost”-in defendant’s policies can reasonably be interpreted to include profit and overhead whenever it is reasonably likely that a general contractor will be needed to repair or replace the damage”).

The court also took issue with the insurer’s policy language seeking to exclude overhead and profit from actual cash value payments “unless the law of your state requires [otherwise].” The court stated this provision was troublesome because it requires “a lay purchaser of a homeowner insurance policy [to obtain] legal assistance to understand what he or she is paying for.”
___________________
1 Konrad Kurach v. Truck Insurance Exchange, No. 150700339, and Mark Wintersteen v. Truck Insurance Exchange, No. 150703543, both before the Court of Common Pleas of Philadelphia County, Pennsylvania.