Court Opinion

ID: 9724940
Source: CourtListenerOpinion
Date Created: 2023-08-26 11:22:03.150207+00
Date Added: 2024-06-11T18:25:08.089881
License: Public Domain

JUSTICE COOK, dissenting: In this case, General Casualty Company (General Casualty) has been ordered to pay its policy limits, $100,000, for the loss of a building purchased one week before the loss for about $21,000. Tracer Industries, Inc. (Tracer Industries), operates a machine shop on South Street in Havana. Across the street from the machine shop was a one-story brick and concrete block auto store and garage, built in 1943. Tracer Industries purchased the auto store and garage on December 23, 1993, paying $67,500. At the time of the purchase, Tracer Industries’ appraiser, Van Bitner, calculated the value of the land to be $50,000, and the value of the building to be $21,134. Another appraiser employed by Tracer Industries, Connie Kennedy, valued the land at $52,500, and the building at $17,400. On December 30, 1993, the auto store and garage burned. Tracer Industries’ appointed appraiser, James Johnston, then determined that the actual cash value of the building was $111,900, and the umpire agreed. Accordingly, General Casualty was ordered to pay its policy limits, $100,000. General Casualty also paid $100,000 for the contents of the building. General Casualty’s appointed appraiser, William Hall, determined that the auto store and garage had an actual cash value of $34,065.44. Johnston explained that his appraisal was so different from the others because he did not consider market value or obsolescence. He considered only the cost of reproduction less depreciation for age. There are problems with using market value to determine the actual cash value, for insurance purposes, of a building destroyed by fire. See 15 Couch on Insurance 2d §§ 54:134 through 54:138 (rev. 1983). Market value only works where there is a true market in which like items are regularly bought and sold. Smith, 219 Ill. App. at 512. Unlike mass-produced personal property, all buildings are unique, and some are very unique. As Johnston said in his appraisal, "[c]hurches, schools, municipalities and special purpose properties typically have little or no easily determinable market value since they are seldom or never sold.” It is also difficult to determine the value of a building separate from the land on which it sits; buildings are usually not sold separate from the land. Smith, 219 Ill. App. at 512. The market goes up and down, and an insured who is obtaining full use from his property should not be penalized because his loss occurs during a time of recession. An insured who obtains a building for a bargain price (a price below market price) should not lose the benefit of his bargain when the building is destroyed. The insured is entitled to be indemnified, to be placed in as good a position as he would have been if no fire had occurred. The insured is entitled to what the building is worth to him, even if it is not worth that much to anyone else. Smith, 219 Ill. App. at 512. A building may have an odd design, pleasing only to the insured, but if the insured is able to use it for his purposes, his recovery should not be limited to what others would pay for it. The insured may have placed a desirable building in an odd location, where no one else would want it, but if the location suits the insured’s purposes, he should not be limited to market value. Location (external obsolescence) is not a factor in determining actual cash value unless it limits everyone’s, including the insured’s, use of the property. All of these factors warrant caution when market value or obsolescence is considered in determining actual cash value. The difficulty is that none of these factors apply in this case. If market value is different from reproduction cost less depreciation, there must be a reason for that difference. Johnston has provided no factual support for his refusal to consider market value or obsolescence. This was not a unique building for Tracer Industries. Apparently Tracer Industries used the building for storage and minor work such as painting. Almost any building, even an old church or school, would have served those purposes. There is a market for old buildings usable for storage purposes. Any old building will do. Although it is difficult to separate the value of a building from the value of the land, Johnston’s appraisal was almost twice the value of this building with the land. This was not a case where Tracer Industries bought high and is being forced to sell low because of market fluctuations. The loss occurred only a week after Tracer Industries bought the property. There is no indication Tracer Industries bought this property for a bargain price; instead, it appears Tracer Industries paid fair-market value. Perhaps the location, near its property, was valuable for Tracer Industries, but location is not a factor in determining the actual cash value of a building. The majority at one point rejects the use of market value because market value considers location (an expensive house "in an area where people would not want to live” would have a low market value (285 Ill. App. 3d at 422)). At another point, in contrast, the majority attempts to support Johnston’s unbelievable appraisal with the observation that location may have been a matter of value to Tracer Industries, as the burned building was right across the street from a building already owned by defendant. 285 Ill. App. 3d at 423. Contrary to the approach taken by the majority, both parties agree that location (external or economic obsolescence) may not be considered in determining the actual cash value of a building. See Smith, 219 Ill. App. at 512. The only question in this case is whether functional obsolescence may be considered. The Marshall & Swift materials, used by Hall and perhaps used by Johnston, contain the following: "External, locational or economic obsolescence is loss in value due to causes outside the property and independent of it, and is not included in the tables.” "External Obsolescence is a change in the value of a property, usually negative but can be an enhancement, caused by forces outside the property itself, and is not included in the tables that follow. The type of property being evaluated, whether residential or commercial, will be impacted differently by these external forces. For example, it is desirable or advantageous for a manufacturing plant to be situated close to a railroad spur; conversely, it is a disadvantage for a residential property to be located close to that same spur.” It is ironic that the majority first rejects the use of market value because market value considers location, then attempts to justify Johnston’s appraisal on the basis of location. No doubt the location here is valuable to Tracer Industries, but Tracer Industries owned the location even after the fire. The question is what value the building had to Tracer Industries. The umpire stated the correct approach: "In insurance appraisal, the general rule is that where a property is being used for the purpose for which it was designed, or is usable for that or another purpose, obsolescence is not a factor in estimating depreciated insurable value.” Encyclopedia at 1135. In the present case, however, the property is not used or usable as an auto store and garage. Tracer Industries is making some use of the building, but not the use for which it was designed, or any comparable use. Tracer Industries does not need a brick and concrete block building for its purposes. A metal shed would do as well. The majority opinion states that at the time of the sale, the auto store and garage was being used as an automotive building. I question that. I recognize that the building was used for those purposes at one time, but I see nothing in the record that indicates that the building was being used for any purpose at the time of sale. There was no evidence on that subject because it was irrelevant to Johnston whether the building was functionally obsolescent: whether it was used or usable for a purpose similar to that for which it was originally designed. Tracer Industries’ argument that a court may never consider market value or obsolescence is not supported by Illinois law. The Smith case is cited for the hard-line rule that market value may never be considered in building loss cases, but it was the insured in Smith who tried to use fair-market value, in order to prevent the application of a coinsurance or average clause. When it came to his claim, however, the insured argued for reproduction value without any deduction for depreciation. Apparently the figures for market value and reproduction cost less depreciation for age were about the same. In Smith, the reproduction cost was about $150,000, and the policy limits were $86,000, indicating that coinsurance applied, despite the insured’s argument that fair-market value was about $90,000. Even though the damage to the building was clearly less than 50%, the trial court awarded damages of $78,409.26, prompting the appellate court’s remark that "[s]uch results are absurd.” Smith, 219 Ill. App. at 511. There is no indication in Smith that market value or obsolescence may not be considered in a proper case. The Maddox case simply cited the statement in Smith that actual cash value means reproduction costs less depreciation for age and not market value. Maddox did not discuss the reasons for the rule or indicate how the rule applied to the facts of that case. Subsequent cases make it clear that obsolescence must often be considered in determining actual cash value. When a building has been abandoned, or is in the process of demolition, the insured is not entitled to reproduction costs if the building is destroyed by fire. Lieberman, 6 Ill. App. 3d at 950, 287 N.E.2d at 40 (insured "suffered no loss by its destruction”). In Knuppel v. American Insurance Co., 269 F.2d 163 (7th Cir. 1959), the court excluded evidence that the insured intended to demolish his building and build a new one, but noted there was no evidence that the insured structure was no longer useful for the purposes for which it was designed. To the contrary, the building was in actual use for restaurant-tavern purposes. Knuppel, 269 F.2d at 166. It appears that the seventh circuit has now adopted a "broad evidence rule,” under which, in arriving at actual cash value, the trier of fact is entitled to consider all evidence relevant to the value of the property at the time of the loss, including both market value and reproduction value. Chicago Title & Trust Co. v. United States Fidelity & Guaranty Co., 511 F.2d 241, 245 (7th Cir. 1975). In First National Bank v. Boston Insurance Co., 17 Ill. 2d 147, 160 N.E.2d 802 (1959), the supreme court held that an insured who had contracted to sell an old 25-room mansion for $19,000 was not limited to the contract price when the mansion was destroyed, but in that case there was no indication that $19,000 was the fair-market value of the mansion. The vendors may have fallen on hard times and been forced to sell quickly. "[M]any factors that are irrelevant to an objective determination of value may enter into the determination of price between vendor and vendee.” First National, 17 Ill. 2d at 151, 160 N.E.2d at 805. Exclusive use of the replacement-cost-less-depreciation test not only unjustly enriches the insured but may provide an incentive for arson. S. Marcus, Actual Cash Value, Illinois and the Broad Evidence Rule: "A Modest Proposal,” 59 Ill. B.J. 1000, 1010 (1971); J. Ingram & P. Giroux, Illinois Should Adopt the "Broad Evidence Rule” in Insurance Indemnity Cases, 71 Ill. B.J. 14, 18 (1982). The majority argues that if General Casualty was willing to write a policy on this property with limits of $100,000 and charge a premium, it cannot complain if it is required to pay that amount. 285 Ill. App. 3d at 426. The majority is mistaken. This is not a valued policy. See 44 Am. Jur. 2d Insurance § 1511 (1982). The mere statement of a policy limit does not create a valued policy, that is, one in which the parties substitute their present assessment for the result of a later controversy. Morreale v. National Fire Insurance Co., 298 F.2d 96, 97 (7th Cir. 1962). "In Lieberman [(where the building was being demolished)] *** the insured had paid a premium for what turned out to be no insurance at all.” Chicago Title, 511 F.2d at 247. General Casualty’s obligation was limited to the actual cash value of the property at the time of the loss, whatever that was. In Smith the insured argued that the insurer was estopped, for purposes of the coinsurance clause, from denying that the value of the property was other than that discussed when the policy was written. The court rejected that argument, noting that a representation of value at the time the policy was written could not operate as a representation of the value at the time of the loss. Smith, 219 Ill. App. at 509. Courts must give great deference to the decisions of arbitrators and agreed appraisers, but those decisions are not immune from attack. The use of arbitrators cannot be allowed to halt the development of substantial case law. State Farm Fire & Casualty Co. v. Yapejian, 152 Ill. 2d 533, 542-43, 605 N.E.2d 539, 543 (1992). Johnston’s appraisal is at odds with the law, and his conduct makes it clear that he was a "hired gun,” employed by the insured to come up with an excessive valuation. So-called experts can usually be obtained to support most any position. People v. Enis, 139 Ill. 2d 264, 289, 564 N.E.2d 1155, 1165 (1990). It is essential that there be assurance as to the impartiality of the arbitrator. Drinane v. State Farm Mutual Automobile Insurance Co., 153 Ill. 2d 207, 212, 606 N.E.2d 1181, 1183 (1992). I would find that the actions of Johnston crossed the line for review, that his actions constitute "fraud, misconduct or palpable or gross error or mistake” (Hetherington, 311 Ill. App. at 583, 37 N.E.2d at 368), or a gross error in judgment in law or gross mistake of fact apparent on the face of the award (Hayes, 278 Ill. App. 3d at 127, 662 N.E.2d at 913). To quote Smith, an appraisal of $111,900 for a building purchased a week earlier for a fair-market value of $21,000 and having no special value to the insured is "absurd.” Smith, 219 Ill. App. at 511. "It is self-evident that a theory that produces such results is wrong in principle and that evidence offered in support of it is unworthy of consideration.” Smith, 219 Ill. App. at 511.