Texas Court Talks Insurance and Actual Cash Value
Shannon M. O'Malley | Texas Law360
April 8, 2015
When an insured suffers a property loss, the insurance policy defines the parameters of recovery. Typically, a property insurance policy’s default valuation provision for a property loss is the actual cash value of the property. Calculation of the actual cash value often takes the age of the property and depreciation into account. Therefore, payment based on actual cash value often does not cover the cost to actually replace the damaged property. Because of that, many insureds choose to pay the additional premium to purchase replacement cost coverage to ensure their property may be rebuilt to its condition before the loss or damage. Of course, the additional premium is based on the assumption that replacement cost is, typically, significantly higher than the property’s actual cash value.
But in some circumstances, even when the policy offers replacement cost coverage, an insured may elect to receive payment based on an actual cash value calculation. If the insured does not intend to make repairs, for example, it can elect the actual cash value option. In certain rare circumstances, however, an insured may believe it can recover more under an actual cash value determination than under replacement cost. This typically occurs when the insured elects to make the repairs itself.
Whether actual cash value offers greater benefit to the insured is based solely on how the actual cash value of the property and the damage is calculated. Most insurance policies do not define “actual cash value.” Accordingly, Texas courts look to a variety of factors to determine what evidence should be considered by a jury in ultimately determining a property’s actual cash value. In Greenspoint Investors Ltd. v. Travelers Lloyds Insurance Co., the court addressed this issue and provides guidance to future litigants and courts concerning application of a policy’s actual cash value coverage.
In Greenspoint, the insured owned a six-story office building in Houston. On Sept. 13, 2008, wind damaged the roof of the building, a skylight and windows, allowing water to enter the building. Greenspoint’s owner created a new company — Ike Reconstruction — to undertake the repair work on the building. Because the two companies were owned by the same person, there was no written contract between them. The owner testified that he “negotiated” the financial arrangement on behalf of both companies. Ike Reconstruction invoiced Greenspoint for the repair work, which it then submitted to Greenspoint’s insurer, Travelers Lloyds Insurance Company, for reimbursement.
Upon receipt of the invoices, and understanding the relationship between Greenspoint and Ike Reconstruction, Travelers requested information concerning Ike Reconstruction’s actual costs. Travelers paid Greenspoint over $2.3 million for building damage, but Greenspoint sought additional payment under an actual cash value calculation and for other repairs and ultimately filed suit.
Court Determined Evidence of Actual Repairs Cost was Admissible to Assist the Jury’s Actual Cash Value Determination
The March 3, 2015, Greenspoint opinion relates to the court’s ruling on the insured’s motions in limine, which it filed to preclude certain evidence in determining actual cash value. The court considered the motions under the standard of Rule 56, allowing additional briefing.
Greenspoint sought the following ruling in limine:
(1) ACV may be determined without consideration of actual cost of a repair; (2) Greenspoint had no obligation to disclose to Travelers its actual costs in making a repair; and (3) the jury may not be informed of the actual cost of a repair in determining ACV because the actual cost of a repair is irrelevant and would be confusing to the jury. Id. at * 3.
The court noted that, like most policies, the Travelers policy did not define actual cash value. Nevertheless, the court recognized “several courts have explained the concept, as compared to replacement cost.” Id.
The court acknowledged actual cash value is typically established via an estimate, as opposed to actual repairs. But the court also noted that under Texas law, actual cash value is synonymous with “fair market value.” Id. at *4. And “fair market value may be determined by looking at comparable sales, income capitalization, or the cost of repair or replacement less depreciation.” Id. The court recognized that “replacement cost” has a number of elements that may increase payment, thereby increasing the amount considered for actual cash value. Specifically, the court questioned whether contractor’s overhead, profit and sales tax may be considered as part of the actual cash value calculation.
The court analyzed Texas case law to address this question, including the Northern District’s opinion in Ghoman v. New Hampshire Insurance Co., 159 F.Supp.2d 928 (N.D. Tex. 2001). In Ghoman, the insured’s hotel sustained damages due to wind and hail. By using excess and surplus materials and having some of the repairs done by onsite maintenance personnel, the insured spent only $140,000 to repair the property. But the parties disputed the measure of loss due under the policy. A subsequent appraisal determined that the replacement cost for a contractor to complete repairs was $300,000, with ACV at $260,000. The court’s replacement cost valuation included calculation of the contractor’s overhead and profits and taxes.
Because the insured only spent $140,000 on the actual repairs, the insurer limited its payment to that amount. The insured sued and the court determined that even though the insured only spent $140,000 on repairs, it was entitled to elect to claim the greater $260,000 ACV payment. The court then noted that it is legally irrelevant that the insured did not actually incur some of the costs claimed under the ACV measure because the insured completed the repairs himself. “Plaintiff contracted for the actual cash value of his loss. His recovery is not tied to the repair or replacement of his property.” Id. at 934-35.
The Greenspoint court recognized this analysis but also noted that other case law sinceGhoman rejected insureds’ claims for actual cash value calculations that included costs that would never be incurred. In Dwyer v. Fidelity National Property & Casualty Insurance Co., 428 F. App’x 270 (5th Cir. 2011), for example, the Fifth Circuit rejected an insured’s actual cash value determination based on a hypothetical contractor’s estimate because the insured sold the property in its unrepaired state and would never incur those hypothetical costs.
The Greenspoint court determined “the linchpin in calculation of replacement costs appears to be whether the challenged cost is reasonably likely to be incurred or not. The court concluded that to determine ACV, the jury may consider the replacement cost of the insured property at the time of the loss, meaning the cost reasonably likely to be incurred in repairing or replacing the damaged property, less depreciation. If the cost is not reasonably likely to be incurred, the jury may omit it in calculating replacement cost.” Greenspoint at *5.
Based on this decision, the court determined that evidence of Greenspoint’s own valuation of its property (i.e., information in tax returns) and the actual expenses incurred in making repairs were relevant in determining the actual cash value of the repairs. Accordingly, the court denied Greenspoint’s motion in limine.
Terms in a Lease Defining Property Rights are Also Relevant to an Actual Cash Value Determination
In addition to its analysis of calculation of actual cash value, the Greenspoint opinion addressed Travelers’ liability for repairs the insured made to tenant property.
Greenspoint leased space in its building to a number of tenants. The leases required the tenant to maintain insurance on the improvements and betterments and also placed repair obligations on the tenant. Despite this allocation of responsibility, after the storm, Greenspoint entered the tenant spaces and made repairs. One such repair involved installing new carpet in a room where an insured stored fiber optic equipment. The tenant testified the repairs were minimal and did not require relocation of the equipment or cause any significant issues in the tenant space.
Nevertheless, Greenspoint sought up to $6.2 million as the “actual cash value” of damage to the fiber optic room. Greenspoint calculated its claim by positing hypothetical repairs including the temporary construction of a new fiber optic room, offsite storage of the fiber optics and more extensive repairs than were actually completed.
The court rejected this overinflated claim noting, “to state the obvious, the policy insures damage to plaintiff’s own property, not property belonging to a tenant. While ACV is generally determined by calculating replacement cost less depreciation, in this case adding into the replacement cost the extraordinary cost of keeping the tenant in operation by relocating its operation during a repair, does not reflect the value of damage to the building.” Id. at *8.
The court further found that Greenspoint had no legal obligation to repair or replace the tenant’s space under the lease. The court noted the lease terms were relevant to determine what was covered under the policy and what was reasonably likely to be included in replacement cost. The court concluded the damage to the fiber optic room could not be calculated with reference to Greenspoint’s hypothetical repair costs and the only evidence that could be considered by the jury was the damage to the shell or slab of the building.
The Greenspoint opinion addresses other evidentiary issues raised by the insured in an effort to inflate its damages claim to be presented to the jury, including application of an “inflation guard” and recovery for extra expenses, expedited expenses, code upgrades and debris removal. In evaluating these claims, and the actual cash value calculation proffered by the insured, the court appeared to recognize the insured’s attempt to recover more than it sustained in actual damage.
Essentially, the insured in Greenspoint appeared to be treating its property damage loss as a means to make money, as opposed to being reimbursed by the insurer for actual damage. The court’s evidentiary rulings summarily reject the insured’s attempt to profit on its loss and provide guidance on how to appropriately calculate an insured’s actual cash value claim.
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