Opinion ID: 1657531
Heading Depth: 1
Heading Rank: 6

Heading: Depreciation Deduction From Cost of Repair

Text: Under the policy at issue in this case, Le Mars had four options for paying Olson's insured hail loss. It could have paid the value of the property, determined at actual cash value as of the time of loss. In the alternative, it could elect to pay the cost of repairing or replacing the damaged property; take all or any part of the property at an agreed or appraised value; or repair, rebuild, or replace the property with other property of like kind and quality. Because the policy gave Le Mars the right to select the payment option, it effectively insured the property for the lesser of actual cash value or the cost to repair or replace the damaged property. It is apparent from the record that Le Mars chose the second option, in that it calculated its proferred payment on the undisputed cost of repairing the partially damaged building. Le Mars argues that because the optional replacement cost coverage, which Olson did not purchase, is defined by the policy as being without deduction for depreciation, it necessarily follows that the basic actual cash value coverage, for which a lower premium is charged, permits a deduction for depreciation from the cost of repair. This would be a persuasive argument if we were dealing with the total destruction of a building insured for an actual cash value determined solely on the basis of replacement cost. In that circumstance, application of a depreciation factor would serve to indemnify the insured for the value of that which was lost, but no more, and it would prevent the insured from receiving a windfall in the form of full replacement cost coverage for which no premium was paid. In this case, however, we are presented with partial damage to a building which will be repaired, not replaced. The Le Mars policy does not specifically provide for a depreciation deduction in this circumstance. Cf. Voges v. Mechanics Ins. Co., 119 Neb. 553, 230 N.W. 105 (1930). The evidence offered by Le Mars regarding standard loss adjustment practices in Nebraska is not useful in resolving the legal issue of whether deducting depreciation from repair costs is permissible under the language of this specific policy. Cases from other jurisdictions can be found to support or refute the argument that depreciation should be deducted from repair costs under actual cash value coverage. In Ins. Co. of North America v. City of Coffeyville, 630 F. Supp. 166 (D. Kan. 1986), the court held that the insurer was entitled to deduct depreciation from the cost of repairing a structure partially damaged by fire. In that case, the insured did not purchase replacement cost coverage, which was defined as the full cost of repair or replacement and was not subject to a depreciation deduction, and the parties' prior course of dealing demonstrated that the insured shared the insurer's definition of actual cash value. See, also, Zochert v. National Farmers Union Property, 576 N.W.2d 531 (S.D. 1998) (permitting deduction of depreciation from repair cost where policy differentiated between actual cash value and replacement cost coverages, and insured elected former). On the other hand, the court in Kane v. State Farm Fire and Cas. Co., 841 A.2d 1038, 1047 (Pa. Super. 2003), held that in the absence of clear language to the contrary, an insurer may not deduct depreciation from the replacement cost and that the phrase `actual cash value' may not be interpreted as including a depreciation deduction, where such deduction would thwart the insured's expectation to be made whole. The court concluded that [w]here qualifying language is absent and an insured is promised `actual cash value,' the insured is entitled to the cost to repair or replace the damaged property. Id. In Glens Falls Ins. Co. v. Gulf Breeze Cottages, 38 So. 2d 828, 830 (Fla. 1949), the Florida Supreme Court affirmed a chancellor's refusal to permit a depreciation deduction from the cost of repairing storm damage to insured structures, reasoning that [i]f depreciation were allowed, it would cast upon the owner an added expense which we do not believe was contemplated by the parties when they entered into the insurance contract. See, also, McIntosh et al. v. Hartford Fire Ins. Co., 106 Mont. 434, 78 P.2d 82 (1938) (holding that depreciation could not be deducted from cost to repair building to its condition prior to fire under actual cash value policy). Most of the cases addressing this issue focus on the principle that an insured under an actual cash value policy is entitled to be indemnified for the actual amount of property loss, but should not be permitted to benefit from the loss. See, e.g., Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349 (Ind. 1982) (agreeing that principle of indemnity is best served by considering evidence relevant to effect of over and under insurance); Elberon Bathing Co. v. Ambassador Insurance Co., 77 N.J. 1, 8, 389 A.2d 439, 442 (1978) (allowing pure replacement cost would violate the principle of indemnity by providing a windfall to the insured). See, also, 6 John Alan Appleman & Jean Appleman, Insurance Law and Practice § 3823 (1972 & Cum. Supp. 2005). The parties in this case agree with this general principle, but disagree as to its application to these facts. [8] We agree with the district court that on the record presented, the policy did not permit the depreciation deduction claimed by Le Mars. As we have previously determined, the insured building had an actual cash value of $200,000 at the time of the loss. In its damaged condition, its value was reduced to $100,000, the price for which Olson sold it to Land. Le Mars elected to calculate its payment under the policy based upon the cost of repairing the partial damage, which was $95,040. There is no evidence that the repairs would cause the actual cash value of the building to exceed $200,000. Recovery of the full repair costs without a depreciation deduction will therefore restore the value of the insured property that existed immediately prior to the loss, but will not enhance that value. Accordingly, we conclude that under an actual cash value policy which does not expressly provide otherwise, an insurer may not deduct depreciation from the cost of repairing partial damage to insured property where the actual cash value of the property, as repaired, does not exceed its actual cash value at the time of the loss. Although we agree with the district court that Le Mars was not entitled to a deduction for depreciation, we disagree with its entry of judgment in the amount of $99,500. Le Mars' liability under its policy is limited to the repair cost of $95,040 less the insured's $500 deductible. Accordingly, we reduce the amount of the judgment to $94,540 and affirm as modified. AFFIRMED AS MODIFIED.