PROPERTY DAMAGE CLAIM EVALUATION IN WASHINGTON (1987)

by Ronald J. Zaremba, CPCU, AIC, ARM

As insurance adjusters, we perform many functions in behalf of the policyholder. These functions include analyzing the insurance coverage and determining what coverage is available, investigating and verifying the facts, documenting and evaluating the damages and settling the claim. This article concerns the evaluation of one type of claim, the property damage claim. Not considered in this article are other limitations placed on the ultimate settlement value of the claim such as the extent of liability, any statutory limits and the extent of coverage. For the sake of discussion these assumptions are not being considered.

Third party claims differ from first party claims in that the former arise out of tort and the latter arise out of a contract. However, the principle of indemnity is applied to both types of claims. The purpose of awarding damage for injury to property in tort actions is to place the injured party as nearly as possible in the condition which he would have been in had the wrong not occurred (Wilson vs. Brand S Corp., 27WA App 743). Property is generally legally classed in three categories; real property which is the land and its improvements, personal property which is movable property of any sort, and intangible property such as copyrights and patents.

Property damage under the liability insurance contract includes physical injury and destruction of tangible property that occurs during the policy period including the loss of use thereof and the loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period. Since intangible property losses are normally not covered, we will not be discussing intangible property losses.

REAL PROPERTY

There are essentially three approaches to evaluating real and personal property values. These approaches include 1) comparable sales, 2) replacement cost less depreciation, and 3) the income approach. Comparable sales is used when there is a clear, established market for the property damaged or destroyed, such as real estate and automobiles. The appraisal of the value of the property and the damage is done by analyzing the market for recent sales and correcting for variations between the property recently sold and the property in question. The area of judgment in this approach obviously is in the adjustments in

attempting to equalize the property in the recent sales to the property in question.

The second common approach to evaluating property damage is replacement cost less depreciation. Usually replacement cost can easily be ascertained. The difficulty is in determining depreciation. Depreciation includes not only physical deterioration but also economic and functional obsolescence. A good working knowledge of the class of property involved and its use is critical in making the proper determination of depreciation.

The income approach is primarily used on real property than can or does general income. In this approach, the value is determined by deducting the normal expenses from the gross income generated by the property and then dividing net income by a capitalization rate to determine the value. If a property has an annual net income of $15,000 and a 15% capitalization rate is used, the value of the property would be $100,000.00

Is the reasonable market rate of return for the investment considering the risk and life expectancy of the property. Again, determination of the capitalization rate requires a good working knowledge of the class of property involved.

The fair market value is normally the maximum that can be collected on losses to real property. Fair market value is generally considered to be the price that the property could have been sold in the course of a voluntary sale between a willing buyer and a willing seller taking into account the use to which the property is adapted or could reasonably be adapted (Merchant vs. Peterson, 690P 2nd 1192). Depreciation is not a factor to be considered if the cost of repairs to restore the property is less than the diminution in value of the realty.

Where the wrong consists of the removal or destruction of some addition, fixture or part of real property, a loss may be estimated upon diminution in value of the premises, if any results, or upon value of parts severed or destroyed. The valuation that should be adopted is the one which will prove most beneficial to the injured party as he is entitled to the benefit of his property intact (DeYoung vs. Swenson, 6WA App 452). Whether injury to the realty due to removal or damage of some property is temporary or permanent, where the property may be replaced or repaired at reasonable expense and at a cost less than the diminution and value of the realty, the replacement cost or repair cost of the damage is the proper measure of damages (Kane vs. Timm, 11WA App 910). An earlier case, Olsen VS. King County, 71WA 2nd 279, said only that when the property damage is temporary and the property can be restored to its

original condition at a reasonable expense, the usual measure of the damage is the cost of restoration and the loss of use. The Kane case extended the same criteria to real property damage whether temporary or permanent.

These cases were later modified in Penny Farms, Inc. vs. Heffron, 24WA App 150. This case dealt with a loss to a commercial orchard, wherein this case, it was determined that the appropriate measure of damages for damage to commercial orchard trees was a loss of productivity, i.e. the dollar value of the production of trees destroyed during the time the orchard owner lost production less the dollar value of foreseeable costs of production. In other words, the diminution in value of the real estate is not always the maximum amount collectable.

PERSONAL PROPERTY

The courts preference is to use market value if markets exists. In McCurdy vs. Union Pacific Railroad, 68WA 2nd 457, the court stated:

"the primary principle to be applied in awarding damages for negligent injuries to property is that the owner shall have actual monetary compensation for the loss sustained. If the property is a total loss, the measure of damage is the value of the property destroyed or damaged. That is its market value, if it has a market value. If the property is damaged but not destroyed, the measure of damage is the difference between the market value of the property before the injury and its market value after the injury. (Again, if it has a market value.) If the property does not have a market value,

then if a total loss, the measure of damage is the cost to replace to reproduce the article. If it cannot be reproduced or replaced, then its value to the owner may be considered in fixing damages."

In an early case dealing with the loss of household goods, wearing apparel and other personal effects, the Washington Court stated:

"it is now generally recognized that wearing apparel

in use, and household goods and effects owned and kept for personal use, are articles which cannot in any fair sense be said to be marketable, and have a market value, or at least a market which is fairly indicative of the real value to the owner and of his loss of being deprived of them. So it has been frequently and we think correctly held that the amount of his recovery in the event of

[loss] ought not be restricted to the price which could be realized by a sale in the market (or market value), but he should be allowed to recover the value to him based on his actual money loss, all the circumstances and conditions considered, resulting from his being deprived of the property, not including, however any sentiment or fanciful value he may have for any reason placed upon it."

Kimball vs. Betts, 99WA 348, also cited in Herberg vs. Schwartz, 89WA 2nd 916. The Kimball case went on to state:

"when goods of this character [household goods] are destroyed, a proper method of arriving at their value at the time of the loss is to take into consideration the cost of the articles, the extent of their use, whether worn or out of date, their condition at the time, etc. and for them to determine what they were fairly worth. The cost alone would not be the correct criteria for the present value, but it would be difficult to estimate the value of such goods, except by reference to the former price in connection with wear, depreciation, change of style, and present condition."

In other words, damages recoverable for loss of personal property is the value of the items to the individual at the time, not replacement cost. Fanciful and sentimental values are not permitted (Herberg vs. Schwartz, 89WA 2nd 916). Depreciation is a factor to consider in adjusting property damage liability claims on personal property.

If the personal property is a total loss, then loss of use is not recoverable (McCurdy vs. Union Pacific ' Railroad, 68WA 2nd 457. In a later case, King Logging Co., Inc. vs. Scalzo, 16WA App 918, the Appellate Court stated that when a negligence claim involved injury or damage to personal property short of complete destruction, the measure of damages is limited to the difference in market value of the property before and after injury or to the reasonable cost of repairs to restore it to its former condition, and for loss of use during the period of repair. The recovery does not usually extend to profits, income or business loss to the injured party during the period of repairs. However if the owner of the damaged property minimizes its losses by procuring substitute or replacement of the property during the period of repairs, he may generally recover reasonable costs of replacement or substitute as general damages to compensate him for his loss of use.

ACTUAL CASH VALUE

The principle of indemnity applies in first party claims or claims

against the insurance policy. The principle of indemnity is to put the policyholder back in the same position he was financially had the loss not occurred. In insurance the principle of indemnity is accomplished by insurable interest, subrogation, apportionment or peroration, and "actual cash value". Not considering the amounts of coverage, specific limitations, extensions, deductibles and co-insurance, all policies pay the "actual cash value" of the loss. Valued policy laws, agreed stated amounts and replacement cost coverage are all exceptions to the principle of indemnity.

The majority of courts follow the "broad evidence rule" in determining actual cash value. The broad evidence rule states that the proper test in a particular case depends upon the nature of the property insured, its condition and other circumstances existing at the time of the loss and recognizes that any evidence which tends to establish a reasonable approximation of the value may be properly considered in determine actual cash value. Under the "broad evidence rule", the courts can consider any evidence logically tending to estimate the value of the insured property including market value and reproduction or replacement values but is not limited to any particular approach.

In 1981, in National Fire of Hartford vs. Solomon, 96WA 2nd 763, the Washington Supreme Court adopted the "Jefferson Rule" from California which states "actual cash value is synonymous with fair market value". Thus for insurance claims on real property, actual cash value equals fair market value. We believe it would be erroneous to apply this rule to personal property in which no market is established such as personal effects, household goods, etc. In determining the actual cash value of the personal property, in a first party claim, we believe the Washington Courts would adopt the reasoning used in McCurdy vs. Union Pacific Railroad and in Kimball vs. Betts.

We were once told by a bodily injury adjuster that property adjusters had it easy as all they had to do was go out and add up the damages and write a check. Granted, in adjusting property losses you're normally not dealing with such intangibles as pain and suffering and inconvenience. However, the areas of property damage adjusting require experience, good judgment and tact on the part of the adjuster. We hope that you find this helpful in adjusting your property claims in Washington.