Pennsylvania Court Takes Measure of Depreciation in Homeowners’ Claims
Depreciation remains legal in the Keystone State (as it should be). A recent opinion from our Superior Court – Pennsylvania’s intermediate appellate court – reinforced this simple topic, but the way the holding was presented had some lawyers in our Insurance Industry Group take particular notice.
On March 10, the Brown v. Everett Cash Mutual court emphasized the legality of withheld depreciation in replacement cost claims. Brown had a homeowner’s claim arising from a fire; the claim was a covered loss, but there were disputes along the way involving how much was paid and why. One of those disputes involved Brown’s refusal to accept a 35% straight line depreciation of the dwelling claim. In reversing a part of the trial court’s ruling, the Brown opinion emphasized that depreciation calculations are fact-based, and advised the trial court of its responsibility to pay particular attention to improvements, remodeling, age, appraiser’s opinions, and the overall condition of the property.
It’s infrequent that an appellate court addresses depreciation, and in our experience, even less frequent that a court criticizes – even indirectly – an insurer’s use of a straight line depreciation method. So, this opinion caught our attention. We liked the predictable part of the opinion, i.e. enforcing decades of precedent regarding actual cash value and withheld depreciation. The Brown court also ratified the carrier’s payment of actual cash value only, when the policyholder didn’t complete the building repairs timely. The policyholders asserted a numerous arguments as to why they were excused/prevented from completing the repairs, including a conspiracy and the enforcement of a local ordinance (likely a fire escrow law, though the opinion is unclear on the point). Regardless, the court held that the completed repairs were a condition of the payment of the holdback. These were straightforward holdings, but they didn’t make the opinion noteworthy. It was the implicit criticism of the 35% that made the opinion important.
In short, Pennsylvania’s appellate court has issued a binding, instructive legal opinion addressing the when, why and how of depreciation in a homeowners claim. That’s a rare event.
The takeaways in the Keystone State, we think, are these:
1. first party property claims remain limited to ACV until the work is complete;
2. policyholders will point to Brown to support demands for detailed explanations about depreciation calculations; and,
3. while depreciation calculations will remain subjective and debatable, they will need to be reasonably supported.
We believe that the next unique wave of property litigation will involve depreciation (to the extent that the depreciation of labor litigation hasn’t already started the trend). The Brown opinion may have blazed a trail for claims and cases to follow. We, here at Timoney Knox, will keep you posted. (March 16, 2017)