When I was a young lawyer, one of the questions that always came up at real estate insurance adjuster conferences was whether it was appropriate to take depreciation when only a repair of a partial property loss was needed. This adaptation concept seems to be lost in recent debates raised by insurance companies who want to write off and not pay for anything until the replacement or repair is done and paid for.
This is not the first time I have covered this topic in this blog. Thirteen years ago in Do not take depreciation to determine the actual cash value of partial loss of real estate in Texas I noticed:
“I̵7;m sure some Texas adjusters will be surprised to learn that Texas case law has considered that when a partial loss occurs, depreciation should NOT be deducted from the loss. I mention this because of the hundreds of loss reports prepared by insurance company representatives where depreciation is routinely deducted.
I anticipate that this post may cause a stir in the insurance community, as it will likely be copied and sent to the same Texas adjuster, I will simply quote Texas cases about the rule. These cases were occasions when judges were confronted with this issue in situations of partial loss. “
That year, I invited a panel to discuss the topic after my speech at the National Association of Public Insurance Adjusters Annual Convention. This was noted in Depreciation should not be taken for partial losses to be repaired:
“My presentation at NAPIA’s annual meeting was entitled ‘The Legal, Ethical, and Practical Adaptation Problems from Windstorm Requirements to Walls, Windows, and Ceilings.’ Goodman, to participate as an expert panel on these adaptation issues. I’ve noticed that this type of presentation keeps the audience involved with dialogue, questions and different opinions and emphasis.
We discussed the practice of depreciation in partial loss situations for structural damage to be repaired. I recently wrote in “Do Not Take Depreciation to Determine the Actual Cash Value of Partial Loss of Real Estate in Texas” that certain Texas case law indicates that depreciation should not be taken on partial losses. Wilkofsky was adamant that depreciation should not be taken and explained that long-standing precedents from New York prevent it.
I suggest that policyholders and insurers carefully check the law in their jurisdiction and decide whether depreciation should be restrained on partial losses where repairs are considered. “Even though many insurance companies routinely take the deduction and make money by playing on floats, that does not mean it is a legal or good practice of faith.”
Earlier this year in An important case in Florida regarding the actual cash value of a partial repair and co-insurance value that public adjusters should study, I noted the problem again because long-standing cases in Florida seemed to prevent depreciation when the real cash value was determined and only repairs needed to be made.
“The decision is important because it determined the lower court’s decision that the repair work on the roofs was not subject to depreciation when determining the actual cash value.”
The 1948 law review article was noted in yesterday’s postCompensation cost policies were originally illegal out of concern for fraud and arson similarly noted that many courts prevented depreciation deductions when considering what the actual cash value was for a partial loss where only repair was considered:
“The really significant development in the partial loss cases has been the recent emergence of the doctrine that in the event of partial loss, no deduction will be made for depreciation. This stems from a case that on its facts, and as a result, are only philosophically associated with the bill. In that case, the insured got back the full value of a destroyed party wall through fire. Perhaps the significance of the case lay in the fact that the insured recovered for more than his share of the wall, or perhaps it was in the idea that a realistic approach should be taken when trying to make the insured whole.
Then, in 1930, insurers were quite upset of the case of Fedas v. Insurance Company in the state of Pennsylvania. Here, the Pennsylvania court seemed to state the principle that in partial loss cases, no deduction is made for impairment. But because of ambiguity in the opinion, the case probably served as an incentive to settlements in Pennsylvania, for the question was not asked before the court in Pennsylvania again.
In 1938, the case of McIntosh v. Hartford Fire Insurance Company followed in which the Montana court, which relies heavily on parts of Feda’s opinion, refused to deduct for depreciation, and is awarded the insured cost of repair with new material. Possibly the compelling effect of the Montana decision as authority in other states is weakened by the court invoking on a local charter. But the court may well have come to the same conclusion results without reference to a charter as broad and general in its terms as was the one referred to.
The Tennessee court in 1943 cited both The cases of Feda and McIntosh, and without such a charter, refused to subside for depreciation, and in an unqualified manner adopted the principle. The background to these cases is that the sum would otherwise be insufficient to complete the repairs. In addition, it can be argued that if a roof is partial burned and the part is replaced with new materials, the insured has no better roof than he had before the fire. What then, below In these cases, is the benefit for the insured to have a compensation insurance? Since there is a co-insurance claim, he must carry more insurance. He must also pay an extra premium for compensation protection. Maybe there is an advantage in that he receives compensation for the property rebuilt instead of being paid according to an estimate perhaps later prove inadequate. “(quotes omitted and paragraphs edited for clarity)
The clear trend in adjusting property insurance losses before replacement cost insurance was first marketed was to not allow deductions for impairment when calculating fair cash value when the loss was a loss of partial loss that required only repair. So why do we allow insurance companies to do that today without justification?
“I have had many fears for our commonwealth, mainly caused by the depreciation of our money.”