The amount and dollar value of insurance claims relating to property loss alone dwarf all other lines of insurance. Water losses in the U.S. result in more than $9 billion in property damage annually. Fire losses result in more than $12 billion in annual damage. Hailstorms cause over $1 billion in damage. Homeowners’ and commercial property policies often provide that the insurer is not required to pay more than the actual cash value (ACV) of the damaged property. Increasingly, however, policies may provide for replacement cost value (RCV) once the insured has replaced the damaged policy in such first-party claims.
When the insurer attempts to subrogate such property losses, there is a big disconnect between the damages recoverable by the insured in a first-party claim and the damages the insurer can recover when it subrogates the claim against the third-party tortfeasor responsible for causing the loss. First-party claim payments are governed by applicable policy language. Third-party property damage recovery is governed by applicable state tort damage laws. First-party replacement value insurance claim payments cannot be recovered in third-party subrogation cases because the default rule for measuring direct damages from partial destruction of personal property is the difference in the market value immediately before and immediately after the damage to such property at the place where the damage was occasioned. J & D Towing, LLC v. Am. Alternative Ins. Corp., 478 S.W.3d 649 (Tex. 2016). “Replacement cost insurance” is optional additional coverage that may be purchased for casualty insurance to insure against the possibility that the improvements will cost more than the ACV and that the insured cannot afford to pay the difference. Unlike standard indemnity, replacement cost coverage places the insured in a better position than he or she was in before the loss and any purported windfall to the insured that purchases replacement cost insurance is precisely what the insured contracted to receive in the event of a loss.
But, what about the third-party case in which the property has no market value? The law of tort damages across all 50 states has recognized the inequities resulting from the use of traditional “market value” damages for certain types of property, and many states have developed alternative mechanisms to compensate owners when such property is damaged. Some of these mechanisms can be used to offset the net loss which results from paying RCV in a first-party claim but only being able to recover ACV in a third-party subrogation tort case.
When damaged property does not have a typical “market” in which such items are bought and sold, calculating damages becomes much more complicated and confusing. Property such as municipal utility poles, signs, school buildings, landmarks, statues, etc., have a “service value” (a/k/a “use value”), but have no traditional market to aid in determining the damages owed by someone who negligently damages such property. For such property, it is difficult, if not impossible, to calculate the diminution in value before and after a loss. A majority of states allow the cost of replacing such an item as the proper measure of damages. A minority of states attempt to implement a formula involving reproduction cost, average useful life, cost of replacement, cost of installation, and depreciation, in coming up with a fair damage valuation.
Intrinsic value is the reasonable value of property to the owner in the condition the property was in when it was damaged, excluding any fanciful or sentimental consideration. Trinkets, etchings, books, pets, family documents, household furniture, jewelry, silverware, family records, clothing, and personal effects are examples of property that do not have a realistic fair market value because they are not easily bought or sold on the market. Instead, they have an artistic or intrinsic value. There is, quite literally, no market for such property, because the value is intrinsic to the owner. As a result, subrogation professionals must be familiar with the law in each state governing such damages. Defendants want the value of such property to be decreased due to depreciation. However, a growing number of courts have followed the “value to the owner” doctrine when valuing property with intrinsic value. The actual or intrinsic value of the property to the owner is to be awarded by a jury in many states. Other states take into consideration other criteria. Florida, for example, has held that “[i]f the item has no market value, such as heirlooms, etc., of necessity other sources must be used to determine value.” The intrinsic value of property is determined by taking into consideration things like its uniqueness, the practicability of repair, the cost of replacing the insured value of the property, the opinion of the owner, and the opinion of experts. Some courts conflate intrinsic value with sentimental value. Interestingly, the intrinsic value theory and other similar concepts were often raised during the depression to argue that market prices were too low to be accepted as evidence of “fair market value.”
One of the more difficult types of property to properly compensate owners for is personal property with sentimental value. Sentimental value is value over and above any market value or intrinsic value a piece of personal property might have. Examples of such property include antiques, heirlooms, wedding memorabilia, photographs, handicrafts, and trophies, etc., although almost anything could have sentimental value. Sentimental value is the value of an object that is derived from personal or emotional association rather than its material worth. Property with intrinsic value may or may not have sentimental value as well. Jewelry accumulated over 50 years of marriage has sentimental value as well as market value. Sentimental value is the inflated opinion value based on what the sellers want. The fair market value differs from sentimental value, as both parties to a transaction must agree to its worth. Many states (e.g., Arizona, Georgia, Louisiana, Mississippi, Missouri, New Jersey, Wisconsin, and Texas) believe that damages should not be determined by the “sentimental or fanciful” value to the owner. Such states do not believe that sentimental value should replace traditional factors such as actual monetary loss together with all the circumstances and conditions resulting from the loss of the property, together with the fact that the property cannot be replaced. At the same time, several states (e.g., Alabama, Arizona, California, Florida, Georgia, Massachusetts, Minnesota, Mississippi, Missouri, New Mexico, New York, Ohio, Oregon, Tennessee, Texas, and others) award damages based on the property’s actual value to its owner. Frequently, whether or not there is a ready market for such property is one factor to be considered in damage valuation. This is especially true where property has both a market value and a sentimental value.
Subrogation professionals should be aware of the applicable law with regard to recovery of property damage in the jurisdiction they are subrogating in. They must be prepared to determine and/or prove that certain property holds some unique historical, cultural or personal value transcending any sentiment the property might hold to its owner. This is sometimes the best way to help courts and juries place a value on some items of damaged or destroyed personal property based upon its actual or intrinsic value. A chart depicting the law in all 50 states with regard to the award of damages to personal property without a typical market value can be found HERE.
If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected].