The two blogs which I have written over the weekend, Replacement Cost Policies Were Originally Illegal Out of Concern For Fraud and Arson and Should Depreciation Be Taken On Partial Losses Requiring Only Repair?, deal with older form polices written before the industry made replacement cost policies commonly available. The study of an insurance topic from an historical view is important. Those trying to come to a more thorough understanding of property insurance law cannot simply read the insurance cases and then start reciting that case law without trying to find the applicable policy being interpreted. The historic context of the policy forms, insurance industry comment and laws at the time have to be considered. The case law is just part of a complete legal understanding.
The property insurance policies written in the 1920’s were different than the 1950’s. The case law has to be somewhat different because the contract terms and statutes and purpose of the policies were different. This is something all of us should remember while reading cases today.
I also try to emphasize reading materials which reflect the reasons for changes in policies as well as comments from practitioners of the day. Many just guess and project their own logic stating the reasons why policy terms changed. These often get repeated until the real truth is simply forgotten. Without trying to find secondary sources, much of the logic and reasoning for insurance contract change is mere speculation. I also find myself guilty of not questioning the source as much any other student. It is simply easier and faster to not question the source.
At a time when the newer replacement cost policies were being introduced into the marketplace, a 1958 University of California at Los Angeles Law Review article, Comment: Insurance Valuation And Adjustment Of Fire Losses on Dwellings: California Law v. Southern California Practice, provides an interesting insight to the debates about taking depreciation on partial losses and adjustment practices of the time in California. The author noted that the indemnity principal had expanded into a concern for the “use value” of the damaged property from the viewpoint of the insured:
When he buys insurance against fire, the insured expects that so long as he pays premiums, he will be covered to the full value of his policy in event of loss. If his house is destroyed, he expects to receive the cash necessary to replace his dwelling with another of the same kind, thus putting him in the same position he was in before the fire. The insurance company seeks the same end, i.e., to provide the insured with sufficient money to enable him once again to return to his former position. Difficulty is encountered, however, when one seeks to determine what each party means by the ‘former position’ of the insured. In the eyes of the company, this is merely a statement of the indemnity principle which underlies all insurance, i.e., the attempt is to evaluate that which the insured had before the fire, and give him its cash equivalent. From this point of view, it is only logical that depreciation and other factors be considered, in order to prevent the insured’s improving his situation as a result of the occurrence of the insured event. But from the insured’s view, his former position represents a certain use value to him, i.e., the building was used as a dwelling. He seeks to have that value restored to him — a feat which cannot be accomplished short of the cash equivalent of full replacement of the home. He cannot move into the cash equivalent of a depreciated home, nor can he construct, with the depreciated cash value of his old home, a replacement residence of the same type.
Of particular interest to me was the author’s research which included interviewing property insurance practitioners and insurance industry officials:
In analyzing local insurance practice, much reliance was necessary upon personal interviews with insurance company officials and practicing adjusters. Reference thereto will appear as INTERVIEWS.
The article is much more enlightening because of the interviews and comments. Regarding partial loss and depreciation, the article’s reliance upon actual practitioners and their adjustment habits made me think of an article co-written by an attorney, John Wood and his public adjuster father, Don Wood. Their 2013 article published by the New York State Bar Association, Insurance Recovery After Hurricane Sandy: Correcting the Improper Depreciation of Intangibles Under Property Insurance Policies, noted the practice that Don Wood was taught when he learned how to practice property insurance adjusting:
Repairs to property in situations of partial loss are never depreciated. I was taught this principle as part of my extensive training as an insurance adjuster, and it is also case law in multiple jurisdictions, including Florida (Am. Reliance Ins. Co. v. Perez, 689 So. 2d 290 (Fla. 3d DCA 1997)); New York (Eshan Realty Corp. v. Stuyvesant Insurance Co. of New York, 202 N.Y.S.2d 899, aff’d, 12 A.D.2d 818, 210 N.Y.S.2d 256 (1961), aff’d, 11 N.Y.2d 707 (1962)); and Kansas (Thomas v. Am. Family Mut. Ins. Co., 233 Kan. 775 (1983)). However, over time, depreciation has evolved into a practice whereby some estimators arbitrarily depreciate structures or assemblies that are totally damaged, as well as apply depreciation if just a portion is being repaired.
This was my experience as well. I was taught in the early 1980’s that all partial losses where repairs were the remedy were not subject to depreciation. As cited over the last two days, there is legal authority for it. But the actual wording of the modern policies has changed. The modern legal opinions debating valuation rarely analyze the differences between older and newer wording. Honestly, I think many policyholder lawyers today don’t know that “actual cash value” cases starting in the 1930’s had a trend to require payment without deduction for depreciation if the partial losses resulted in repairs. Older property insurance adjusters certainly know the issue.
Another point is clear from this post—you are not an expert in property insurance law merely because you have read a bunch of property insurance cases.
Thought For The Day
A small body of determined spirits fired by an unquenchable faith in their mission can alter the course of history.
—Mahatma Gandhi
