When I was a young attorney, one of the issues which always came up at property insurance adjuster conferences was whether it was appropriate to take depreciation when only a repair was needed to a partial property loss.  This adjustment concept seems to be lost in newer debates raised by insurance companies who want to depreciate and not pay for anything until replacement or repair is made and paid.

This is not the first time I have raised this topic in this blog. Thirteen years ago in  Do Not Take Depreciation to Determine Actual Cash Value of Partial Loss to Real Real Property in Texas, I noted:

I am certain some insurance Texas adjusters are going to be surprised to learn that Texas case law has held that when a partial loss happens, depreciation SHOULD NOT be deducted from the loss. I mention this due to the hundreds of loss statements prepared by insurance company representatives where depreciation is routinely deducted.

Anticipating that this post may cause an uproar in the insurance community, as it likely will be copied and sent to those same Texas adjusters, I will simply quote Texas cases on the rule. These cases were instances where judges were faced with this issue in partial loss situations.

That year, I invited a panel to discuss the topic following my speech at the National Association of Public Insurance Adjusters Annual Convention. This was noted in Depreciation Should Not Be Taken for Partial Losses That Are To Be Repaired:

My presentation at NAPIA’s Annual Meeting was titled, ‘The Legal, Ethical, and Practical Adjustment Issues from Windstorm Claims to Walls, Windows and Roofs.’ I asked three others, New York attorney Jonathan Wilkofsky, New York public adjuster Ron Papa, and Maryland public adjuster Randy Goodman, to participate as an expert panel on these adjustment issues. I have found that this type of presentation keeps the audience involved with dialogue, questions and differing views and emphasis. It was a high level nuts and bolts analysis of adjustment issues that occur regularly in windstorm claims.

We discussed the practice of taking depreciation in partial loss situations for structural damage that is to be repaired. I recently posted in, ‘Do Not Take Depreciation to Determine Actual Cash Value of Partial Loss to Real Real Property in Texas,’ that some Texas case law indicates depreciation should not be taken on partial losses. Wilkofsky was adamant that depreciation should not be taken and explained that long standing New York precedent prevents it.

I suggest that policyholders and insurers carefully check the law in their jurisdiction and determine whether depreciation should be held back on partial losses where repair is contemplated. While many insurance companies routinely take the deduction and make money playing the float, it does not mean it is a legal or good faith practice.

Earlier this year in An Important Florida Case Regarding Actual Cash Value of a Partial Repair and Coinsurance Sound Value That Public Adjusters Should Study, I again noted the issue because longstanding Florida cases seemed to prevent the taking of depreciation when determining actual cash value and only repairs had to be made.

The ruling is important because it upheld the lower court ruling that the repair work to the roofs was not subject to depreciation when determining actual cash value. 

The 1948 law review article noted in yesterday’s post, Replacement Cost Policies Were Originally Illegal Out of Concern For Fraud and Arson similarly noted that many courts prevented the deduction of depreciation when considering  what the actual cash value was for a partial loss where only repair was contemplated:

The truly significant development in the partial loss cases has been the recent emergence of the doctrine that in case of partial loss, no deduction will be made for depreciation. This stems from a case which on its facts, and in result, is connected only philosophically with the proposition. In that case, the insured recovered for the full value of a party wall destroyed by fire. Perhaps the significance of the case was in the fact that the insured recovered for more than his portion of the wall, or perhaps it was in the idea that a realistic approach ought to be taken in attempting to make the insured whole.

Then, in 1930, the insurers were rather upset by the case of Fedas v. Insurance Company of the State of Pennsylvania. Here the Pennsylvania court seemed to enunciate the principle that in partial loss cases, no deduction is to be made for depreciation. But because of lack of clarity in the opinion, the case probably served as an incentive to settlements in Pennsylvania, for the question was not brought before the Pennsylvania court again.

There followed in 1938 the case of McIntosh v. Hartford Fire Insurance Company  in which the Montana court, relying heavily on portions of the Fedas opinion, refused  to deduct for depreciation, and awarded to the insured the cost of repairing with new materials. Possibly, the persuasive effect of the Montana decision as authority in other states is weakened by the fact that the court relied on a local statute. However the court might well have reached the same result without reference to a statute so broad and general in its terms as was the one referred to.

The Tennessee court in 1943 cited both the Fedas and McIntosh cases, and without such a statute, refused to deduct for depreciation, and in an unqualified manner adopted the principle. The rationale of these cases is that otherwise the sum would be insufficient to complete the repairs. Furthermore it is arguable that if a roof is partially burned and the portion is replaced with new materials, the insured does not have a better roof than he had before the fire. What then, under these cases, is the advantage to the insured in having replacement insurance? Since there is a co-insurance requirement, he must carry more insurance. He must also pay an extra premium for replacement coverage. Perhaps there is an advantage in that he is reimbursed after the property is rebuilt rather than paid according to an estimate which might later prove insufficient. (citations omitted and paragraphs edited for clarity)  

The clear trend when adjusting property insurance losses before replacement costs policies were first marketed was to not allow for deduction of depreciation in the calculation of actual cash value when the loss was one of partial loss only requiring repair.  So, why do we allow insurance companies to do it today without justification?


Thought For The Day

I have had many anxieties for our commonwealth, principally occasioned by the depreciation of our money.
—Patrick Henry