When your home is damaged by vandalism, fire, wind or water damage, you will need to submit an insurance claim to your homeowner’s insurance company to get the damage repaired. While some insurance disputes are about whether a claim is covered, an insurance company frequently will concede coverage but dispute the value of the loss. Although your insurance policy might entitle you to the “actual cash value” of your loss, policies typically permit deductions from this amount for items like depreciation or “obsolescence”.
Typically, people think of obsolescence as covering aspects of a home that are functionally obsolete like a circuit breaker box that does not comply with building codes or a five bedroom home that has only one bathroom. However, a recent case addressed the issue of economic obsolescence, which essentially refers to a decrease in market value because of factors external to the home. The insurance company in federal court in another state argued that a loss in market value from this type of factor should be included in obsolescence.
In Whitehouse Condo. Group, LLC v. The Cincinnati Ins. Co., a federal court held that the term “obsolescence” did not include diminished market value from external economic factors. The insured’s condominium building was destroyed in a fire. The insurance company did not dispute coverage but disputed the “actual cash value” of the building. The policy indicated the insurance company would pay “actual cash value”, which was defined as “replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.”
The insurance carrier contended that the language of the policy included not just functional but also economic obsolescence. When interpreted in this broad sense, the value of the loss was $1,187,660. This value was based on a significant decline in market value, resulting from the real estate market crash. The policyholder argued for a more narrow interpretation of the term focused exclusively on functional obsolescence, which would make the value of the claim $2,767,730.
The District Court offered a number of justifications for a narrower reading of the term at issue. The court noted that the use of the word “deduction” suggested only functional obsolescence should matter because market value can go up or down. Further, the insurance carrier could have used the term “market value”, which would have eliminated the ambiguity in the policy language.
The Court of Appeals upheld the trial judge and ruled in favor of the policyholder. The court noted that the other items that were deducted from replacement value under the policy, such as age, depreciation, and condition of the building were all related to inherent features of the structure rather than external factors. The Court of Appeals relying on prior cases also applied reasoning similar to the District Court indicating that prior cases treat the term “economic obsolescence” as a specialized term not typically included in the general notion of obsolescence.
When you are involved in a dispute with your insurance company, the insurer might assert creative theories like this one to minimize the potential payout. If the court had accepted the insurance company’s broad definition, the value of the insured’s claim would have been reduced by over $1.5 million dollars.
