Insurance Claims
When ACV is RCV Less Depreciation
Barry Zalma | Zalma on Insurance
December 10, 2014
The definition of the insurance term “actual cash value” (ACV) has resulted in multiple definitions depending on jurisdiction. Some define it as fair market value, some define it as replacement cost value (RCV) less physical depreciation and others apply the broad evidence rule combining the various definitions to reach the promised full indemnity. Since a first-party-property policy agrees to pay ACV first and then, after the property is replaced the difference between RCV and ACV, it is in the best financial interest of the insured to obtain the highest possible ACV, especially if the insured does not want to rebuild.
In Sierra Pacific Power Co. v. Hartford Steam Boiler Inspection and Ins. Co., Slip Copy, 2014 WL 6883056 (D.Nev., 12/05/14) the United States District Court for the District of Nevada was called upon to resolve a dispute over the value of a dam and the amount required to be paid to the owner of the dam by its insurers after the dam was destroyed by a flood. The owner claimed the ACV was RCV because the value of the dam, when rebuilt, would be the same as it was before the loss. The insurers claimed ACV must be determined by RCV less physical depreciation. The case was tried, appealed to the 9th Circuit, reversed, and retried.
FACTUAL BACKGROUND
Sierra Pacific operates power generation stations in Nevada and California. Defendants insure Sierra Pacific’s facilities, including the Farad Dam on the Truckee River in California (the “Dam”). The Dam was completely destroyed by a flood in 1997, at which point Sierra Pacific filed a claim for damages with Defendants.
Following a three-day bench trial the Court awarded declaratory relief and entered judgment in favor of Sierra Pacific in accordance with the Court’s Findings of Fact and Conclusions of Law. The Court determined that the actual cash value (“ACV”), with proper deduction for depreciation, of the Dam was $1,261,000. The Court further determined that the replacement cost of the Dam was $19,800,000.
The parties appealed and the Ninth Circuit Court of Appeals issued a Memorandum vacating the Court’s finding that the ACV of the Dam was $1,261,200, and remanding for a determination of the ACV based on reducing the replacement cost of $19,800,000 by the “appropriate” depreciation, and to fashion an appropriate order tolling the three-year period for replacing the Dam until the conclusion of the litigation in this matter.
The Ninth Circuit rejected the proposed ACV of $1,261,200 because it was not related to the figure found as the replacement cost ($19,800,000).
On retrial the trial court then held that based on the evidence presented at trial, it was appropriate to apply a 50% rate of depreciation for the in-river Dam and a 5% rate of depreciation for the wing wall, and that subtracting this depreciation from the full replacement cost yielded an ACV of $12,216,600.
DISCUSSION
Depreciation
Sierra Pacific argues that the Court’s calculation of depreciation and ACV is incorrect because the Court (1) based its determination of the appropriate depreciation factor on a mistake as to the age of the Dam, (2) failed to apply the legally-mandated methodology for determining depreciation in the casualty insurance context, (3) relied on invalid, factually unsupported assumptions regarding the relationship between the age of the Dam and its value, (4) relied on evidence for establishing the 50% depreciation factor that the Ninth Circuit rejected as a basis for making any valuation determinations, and (5) incorrectly interpreted the order of the Ninth Circuit as mandating that the replacement cost of the Dam be reduced by a depreciation factor greater than zero.
As an initial matter, the Court acknowledges that it inadvertently stated that the Dam was 100 years old at the time of the flood; it is undisputed that the Dam was thirty-four years old. By itself, however, the Court’s inadvertent use of that date does not require amendment of the rate of depreciation, which was based on evidence presented at trial.
Despite multiple opportunities—at trial and after the Ninth Circuit’s July 27, 2012 Memorandum—to present evidence regarding the proper depreciation rate to apply to the Dam, Sierra Pacific has maintained that the Court should determine that the ACV is equivalent to replacement cost because the value of a newly constructed Dam would be equivalent to the destroyed Dam.
The Hartford and Zurich policies each state that valuation is “actual cash value (with proper deduction for depreciation) of the property destroyed.” The Ninth Circuit has held that “[s]ince the Policy uses these precise words, the ACV should be determined as replacement cost less depreciation of the dam.” Sierra Pac. Power Co. v. Hartford Steam Boiler Inspection & Ins. Co., 665 F.3d 1166, 1171 n. 2 (9th Cir.2012) because the term was clearly defined in the policy.
The Ninth Circuit also noted that “where the property to be replaced has no sales market, such as the Farad Dam, California Courts have sanctioned the use of replacement cost less depreciation as an acceptable method for determining ACV.” Sierra Pac. Power Co. v. Hartford Steam Boiler Inspection & Ins. Co., 490 Fed. Appx. 871, 875 (9th Cir.2012).
The Hartford and Zurich polices also include the standard California language on appraisal for disagreements that arise as to amount of loss. There is no evidence that Sierra Pacific ever demanded an appraisal to determine ACV of the Dam when it was destroyed. Additionally, although no document indicates that Sierra Pacific agreed to the 50% depreciation rate, Defendants testified at trial that Risley, a Sierra Pacific employee at the time, agreed to the 50% depreciation rate. Such an agreement would void Sierra Pacific’s argument that it was not bound by the 50% depreciation rate.
The Ninth Circuit has rejected Sierra Pacific’s argument that it is entitled to replacement cost without a reduction for depreciation. Additionally, Sierra Pacific failed to produce any evidence—either at trial or after the Ninth Circuit’s Memorandum—that the Court should apply a lower depreciation rate than the trial court applied in its order. Accordingly, the Court denied Sierra Pacific’s Motion to Amend on this ground and affirms that the ACV of the Dam when it was destroyed was $12,216,600.
If Sierra Pacific decides to rebuild the Dam, it shall recover prejudgment interest on the full replacement cost of $19,800,000, less the $1,600,000 deductible, and less Defendants’ $1,011,200 payment, beginning April 3, 2001. If, on the other hand, Sierra Pacific does not rebuild the Dam, it shall recover prejudgment interest on the $12,216,600 ACV, less the $1,600,000 deductible, and less Defendants’ $1,011,200 payment, beginning April 3, 2001. Interest shall accrue at ten percent per annum pursuant to California Civil Code § 3289(b).
Good cause appearing, the Court concludes that the ACV of the Dam is $12,216,600. If Sierra Pacific rebuilds the Dam, it shall be entitled to the full replacement cost of $19,800,000 less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, plus prejudgment interest on the replacement cost less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, effective respectively from the date of the loss and the date of the $1,011,200 payment.
If Sierra Pacific does not rebuild the Dam, it shall be entitled to the $12,216,600 ACV less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, plus prejudgment interest on the ACV, less the deductible of $1,600,000 and less Defendants’ prior payment of $1,011,200, effective respectively from the date of the loss and the date of the $1,011,200 payment.
The Court also reaffirms its prior Order that the three-year period granted for rebuilding the Dam shall be tolled until the conclusion of this litigation. Due to the interest in maintaining reasonable prejudgment interest, Sierra Pacific shall decide to rebuild the Dam or recover its ACV within ninety days of the conclusion of this litigation.
ZALMA OPINION
Because this case involves a great deal of money to replace the dam litigation ensued over the determination of ACV. Had the parties been interested in avoiding unnecessary litigation either the insurers or the insured could have demanded appraisal and allowed a panel of appraisers (arbitrators) to determine ACV and RCV. They chose to litigate instead and forced the court to determine the amount of loss. It did so and now Sierra has three months to decide if it will rebuild the dam to recover the difference between the ACV and RCV. That they fought so hard to have ACV and RCV determined to be the same amount one could speculate that the plaintiff has no intent to rebuild.
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SOURCE: zalma.com