Opinion ID: 1901704
Heading Depth: 2
Heading Rank: 1

Heading: Replacement Cost Damages

Text: As its lead issue, Monsanto contends that the trial court erred in submitting to the jury Appellees' $135 million building replacement cost claim. In Pennsylvania, the general measure of damages for permanent harm to real property is the diminution in market value attributable to the conduct, product, or instrumentality giving rise to liability, and in situations in which the harm is reparable, damages are assessed according to the lesser of the cost of repair or the market value of the affected property. See Lobozzo v. Adam Eidemiller, Inc., 437 Pa. 360, 369 & n. 6, 263 A.2d 432, 437 & n. 6 (1970). [4] At trial, however, Appellees relied on a prevailing exception to the general rule reflected in Department of Transportation v. Estate of Crea, 92 Pa. Cmwlth. 242, 483 A.2d 996 (1977), in which the Commonwealth Court authorized utilization of an unbounded replacement cost figure as a measure of damages in a situation in which a defendant/motorist negligently drove his automobile into the superstructure of a public bridge, causing it to collapse. See id. at 253, 483 A.2d at 1002. The trial court accepted this theory, quoting the Crea court's reasoning, as follows: [A]s value in the commercial sense is determined by the market demand for the thing valued, Sechrist v. Bowman, 307 Pa. 301, 161 A. 332 (1932), the application of such a damage formula to property in the public domain, such as a bridge forming a part of a highway system, cannot possibly fulfill its purpose of compensating the injured party for the actual loss sustained. The `value' of such a bridge regardless of its age, condition and other circumstances cannot possibly be determined for want of any such value in the market place. Any attempt to so value it would be wholly speculative, the very pitfall to be avoided in proof of damages. U.S. Mineral Products, 809 A.2d at 1001; see also Crea, 92 Pa.Cmwlth. at 253, 483 A.2d at 1002 (reasoning that anything less than the reasonable cost of replacement by a similar structure consistent with current standards of design would not compensate the owner for the actual loss). The trial court rejected Monsanto's argument that Crea's holding should be confined to situations involving highly unique structures such as bridges, as to which there are no willing buyers and sellers. Although it acknowledged that Monsanto presented evidence that the T & S Building had an ascertainable market value in the Harrisburg commercial real estate market, the court relied on Appellees' evidence that the Building was part of the Capitol complex, and that legislative approval would be required before the T & S Building could be sold, in holding that the Crea exception should apply. See DGS v. U.S. Mineral Products, 809 A.2d at 1014. According to the trial court, these factors would support a jury finding that the T & S Building had no value in the commercial sense and that the proper measure of damages, therefore, was its replacement cost. See id. Over Monsanto's objection, the trial court charged the jury, in relevant part, as follows: You have heard evidence of the costs incurred by the plaintiff to build the new Keystone Building as a replacement for the demolished Transportation & Safety Building. If you find that the T & S Building was a total loss, damages are to be measured either by its market value or its special value to the plaintiff, whichever is greater. The T & S Building was operational, albeit it had inadequacies. Consequently, you may determine that it had a value to the plaintiff regardless of its market value. In order to recover replacement costs, plaintiff must prove, in addition to all of the things that I have already instructed you, on [sic] these additional elements[:]    [F]irst that PCBs could not have been cleaned up to a level safe for occupancy and, second, that the T & S Building was unique and totally incapable of commercial appraisal. N.T., August 10, 2000 (morning), at 105-07. Presently, Monsanto's primary argument on this point is that the trial court's authorization for Appellees to proceed on a $135-million replacement cost theory predicated on the Commonwealth's construction of the new Keystone Building (described by Monsanto as state-of-the-art), constituted an unprecedented authorization of a windfall, particularly in light of the post-fire condition of the T & S Building independent of the PCB involvement. See Brief of Appellant at 26-34. Characterizations aside, we agree with Monsanto's central contention in this regard. In the first instance, to the extent that Crea accepts the principle that special-purpose property may be not be amenable to conventional market-valuation assessment, and therefore, utilization of some alternate methodology may be appropriate in determining due compensation for associated loss or destruction, it is consistent with the law of this and other jurisdictions to the effect that an injured plaintiff should not be deprived of fair recompense merely because there is some degree of uncertainty associated with the calculation of damages. See, e.g., Smail v. Flock, 407 Pa. 148, 154, 180 A.2d 59, 62 (1962). [5] See generally John W. Reis, Measure of Damages in Property Loss Cases, 76-OCT FLA. B.J. 32, 37 & n. 30 (2002) (collecting decisions from other states). [6] What is remarkable about Crea is the court's decision to dispense with any allowance for pre-loss depreciation to account for the increased benefit that would inure to the plaintiff upon an award of the replacement expense. [7] Such an approach conflicts with this Court's long-standing case authority which recognizes the role of depreciation in the assessment of fair compensation, and correspondingly, in the avoidance of windfall recovery. See, e.g., Jones v. Monroe Elec. Co., 350 Pa. 539, 544, 39 A.2d 569, 571 (1944) (indicating that unremediable damages to a building are calculated based on actual value of the building itself, taking into consideration its age, condition, and any other circumstances affecting it  (emphasis added)); Romesberg, 385 Pa. at 39, 122 A.2d at 54; accord 22 AM.JUR.2D DAMAGES § 225 (2004). [8] As Appellees observe, the rationale justifying assignment of an enhanced role to building costs in special-use cases hinges on the recognition that, in the absence of comparable properties in the marketplace or income generated by the property in question, construction costs may be the only reasonably available indicator of value. Analogously, this circumstance also helps to explain the import of the cost approach to market valuation, which, although generally regarded as one of the least reliable indicators of value, remains a well-recognized guide in real estate appraisal. See generally Sullivan, Valuation of Structure Based on Reproduction or Replacement Cost, 8 AM.JUR. PROOF OF FACTS 2D at 406. Significantly, however, as with all other approaches to market valuation, pre-loss depreciation is taken into account in the application of this methodology. See id. at 429 (observing that, in spite of difficulties, it seems undisputed that in appraising property by the cost approach the appraiser must always consider depreciation); accord RESTATEMENT (SECOND) OF TORTS § 911, cmt. e (1956) (Even when the subject matter has its chief value in its value for the use by the injured person, if the thing is replaceable, the damages for its loss are limited to replacement value, less an amount for depreciation.  (emphasis added)). There are decisions in other jurisdictions that reflect that, where replacement or reproduction costs are not wholly unreasonable relative to the pre-loss condition of the property, it may not be necessary to specifically account for depreciation in a special-purpose property case; this may be one way to read Crea; and we need not proceed further in this case to evaluate Crea's correctness as applied to the facts that were presented to the intermediate appellate court in that case. Rather, we hold that Crea's approach of foregoing an adjustment to replacement cost to account for depreciation cannot be fairly transported to the present setting involving the replacement of a thirty-year-old office tower in the condition of the T & S Building to a new, materially different, and substantially improved structure. [9] We do recognize the difficulty of quantifying depreciation in a situation in which there is little or no market for a property, since depreciation is conventionally understood in terms of the impact of factors such as wear and obsolescence on the price that prospective purchasers would be willing to pay. See supra note 7. Once the abstract figure of replacement or reproduction costs is presented as an indicator of value, however, we find it preferable to require consideration of an analogously abstract depreciation figure over simply disregarding (or permitting a jury to disregard) material considerations such as obsolescence, deterioration, damage, and similar matters that may confront owners of an aged structure. In summary, while this Court has rejected fixed and formulaic rules when it is determined that they are not setting an appropriate, compensatory standard, see, e.g., Incollingo v. Ewing, 444 Pa. 263, 308, 282 A.2d 206, 229 (1971), and there are many nuances and significant latitude associated with valuation for the purpose of calculating damages, in this case we conclude that, by authorizing the award of damages for property loss based solely upon raw replacement costs, the trial court erroneously extended the range of permissible damages outside the realm of fair compensation.