The Supreme Court of Nebraska has ruled on a dispute involving actual cash value, and this ruling has prompted a reaction on the part of the Nebraska Department of Insurance. The case is Olson v. Le Mars Mutual Insurance Company of Iowa, 696 N.W.2d 453 ( Neb. 2005).

There was no dispute over the facts in this case. Olson owned a grain storage building that was insured under a policy written by Le Mars; the building was approximately forty years old. The building was partially damaged by hail and the cost of repair was set at $95,040. Olson had a $500 deductible and had not purchased the optional replacement cost coverage. Olson demanded the amount of his loss, minus the deductible, but the insurer deducted $36,710.40 for depreciation and offered Olson the sum of $57,365.60.

Olson refused that amount and he filed a lawsuit against Le Mars. The lower court found in favor of Olson and the appeal went to the state Supreme Court.

The Supreme Court noted that the dispute involved whether Le Mars was obligated under its policy to pay the amount Olson claimed was due, or whether the insurer was permitted to deduct a depreciation factor from the repair cost in order to arrive at a net amount due. The court also noted that the policy in question here did not include a specific definition of actual cash value. In such circumstances, the court said, there was a priority of rules to determine actual cash value; the rules are: where market value is easily determined, actual cash value is market value; if there is no market value, replacement or reproduction cost may be used; failing these two tests, any evidence tending to formulate a correct estimate of value may be used. (In two previous cases, the Nebraska Supreme Court had held that actual cash value was the market value, which is the amount for which property may be sold by a willing seller who is not compelled to sell it to a buyer who is willing but not compelled to buy it. The court further stated that, in determining such value, the finder of fact should consider the situation and the condition of the property as it was at the time of loss, and all other facts and circumstances shown by the evidence that affected or had a tendency to establish its value.)

The insurer contended that, because it insured the building for actual cash value (at Olson's choosing), the deduction of depreciation was proper. Le Mars also urged the court to adopt the broad evidence rule which permits a finder of fact to consider every fact and circumstance that would logically tend to the formation of a correct estimate of the building's value. Such facts and circumstances would include the original cost of the building, the economic value of the building, the income derived from the use of the building, the age, condition, and market value of the building, and the deterioration to which the building had been subjected over the years.

The court indicated that it had no particular quarrel with that definition, but stated that actual cash value must still be measured as an economic unit, or fair market value. The court also looked to other jurisdictions for guidance on whether depreciation should be deducted from repair costs under actual cash value coverage; the court cited cases from Kansas, South Dakota, Pennsylvania, Florida, Montana, Indiana, and New Jersey. The court found that most of the cases addressing the issue focused 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. And, using this guidance, the court found that Le Mars was not permitted to depreciate its payment to Olson.

The court said that there was undisputed evidence in this case that the value of the building as an economic unit was $200,000 immediately prior to the hail damage. The repair costs would not cause the actual cash value to exceed this amount. Therefore, recovery of the full repair costs without a depreciation deduction would simply restore the value of the insured property that existed immediately prior to the loss, but would not enhance that value. Accordingly, the court concluded that under an actual cash value policy that does not expressly provide otherwise, an insurer could not deduct depreciation from the cost of repairing partial damage to insured property where the actual cash value of the property, as repaired, did not exceed its actual cash value at the time of the loss.

This ruling by the Nebraska Supreme Court prompted the state Department of Insurance to notify insurers that deduction for depreciation will not be permitted under Nebraska law. This pertains to policies where the insurer did not include explicit terms permitting the deduction of depreciation from claims settlements made on an actual cash value basis. Insurers will be allowed to endorse their new and renewal policies to include language to explain in more detail the deduction of depreciation for losses paid on an actual cash value basis.

Iowa Amends the Insurance Code

Iowa has amended its insurance code to state that the entire policy shall be void if an insured has willfully concealed or misrepresented any material fact or circumstance concerning the insurance. This rule also applies in the case of any fraud or false swearing by the insured.

Faulty Workmanship Means No Coverage for Insured

Faulty workmanship and the question of coverage under a general liability policy continue to be an area where insureds and insurers find themselves in dispute. A court of appeals in North Carolina offers a recent example of judicial thinking on the subject. The case is Production Systems, Inc. v. Amerisure Insurance Company, 605 S.E.2d 663 ( Ct. App. NC 2004).

Production Systems, Inc. (PSI) is a corporation in North Carolina engaged in the business of design and manufacturing of industrial machinery. Rubatex is a business engaged in the manufacturing of rubber products. PSI contracted with Rubatex to design, construct, and install two foam rubber sheet line systems at Rubatex's plant; PSI was responsible for designing, building, and installing the line systems. After PSI had completed its work and turned the systems over to Rubatex, problems arose. It was determined that certain components of the conveyor belts were improperly installed, were misaligned, and would not track properly. The defective conveyor belt assemblies caused damage to other parts of the system and Rubatex had to shut down the systems repeatedly until repairs were made.

Because of the problems, Rubatex refused to pay PSI for the sums owed under the contract. PSI filed a lawsuit and Rubatex counterclaimed. The counterclaim alleged that PSI had failed to design, construct, and install proper line systems; Rubatex claimed breach of contract, breach of warranty, and breach of merchantability, and sought damages for the cost of repairing the line systems and for the loss of use. PSI sought coverage under its liability policy with Amerisure.

Amerisure denied coverage and PSI filed a lawsuit seeking a declaratory judgment that the insurer was obligated to defend and indemnify. The trial court found in favor of the insurer and PSI appealed.

The appeals court noted that the general liability policy applied to property damage caused by an occurrence. The dispositive issue for the appeals court was whether the facts in this case described property damage as defined in the liability policy. Property damage was defined as physical injury to tangible property, including all resulting loss of use of that property. The court took this to mean property damage was damage to property that was previously undamaged and not the expense of repairing property or completing a project that was not done correctly or according to contract in the first place. Property damage required that the property allegedly damaged had to have been undamaged at some previous point in time, and this is inconsistent with allegations that the subject property was never constructed properly in the first place. The court decided that damages based solely on shoddy workmanship (that is, damages seeking repair costs and/or completion costs) were not property damage within the meaning of a standard form CGL policy. There was no property damage in this case because the only damage was the repair of defects in, or caused by, the faulty workmanship in the initial construction.

Judgment for the insurer was upheld.

Who Is An Insured under an Auto Policy?

This case was an action seeking insurance coverage for a claim stemming from a fatal auto accident. The issue presented to the court was whether Erwin Guerra was an insured person for purposes of coverage under his employer's business auto insurance policy. The case is Pham v. Hartford Fire Insurance Company, 419 F.3d 286 (4th Cir. Va. 2005).

Guerra was employed by OSP Consultants. During temporary assignments, OSP provided its work crews with an apartment in which to live and a weekly per diem allowance. Guerra was working on a temporary assignment in Denver as lead laborer. In this position, he drove OSP employees to and from the job site, organized and supervised his crew, and acted as liaison between the crew and OSP. Guerra used his own car to obtain groceries and to transport OSP employees to social gatherings since OSP did not allow company-owned vehicles to be used by employees once the daily work assignments were completed.

One morning, after drinking and socializing with other OSP employees, Guerra was driving his co-worker back to his apartment.

While en route, Guerra drove his car through a red light and collided with another car that had entered the intersection. The occupants of the other car were seriously injured and the driver later died from his injuries. The injured parties filed a lawsuit against Guerra and were awarded a judgment. They then filed this lawsuit to have the judgment against Guerra paid by Hartford , which was the auto insurer for OSP. The plaintiffs alleged that Guerra was an insured person under the business auto policy of OSP.

The business auto policy declared that anyone is an insured while driving a covered auto that the named insured owns, hires, or borrows. And, by endorsement, any employee of OSP was an insured while using a covered auto that OSP did not own, hire, or borrow in OSP's business or personal affairs. The plaintiffs argued that this meant the auto policy applied to Guerra. The court did not agree. The court felt that this was a strained construction because it omits the plain requirement of using the auto in the business or personal affairs of OSP. The court noted that Guerra admitted that he was not acting on behalf of his employer at the time of the accident; he was driving his personal auto while off duty at the time of the accident. This meant to the court that Guerra was not using his car in OSP's business or personal affairs. Guerra was not an insured and his personal auto was not a covered auto, so the

Hartford policy did not apply to this claim.

Homeowners Case of Note

Coverage for musical equipment is often not addressed when arranging homeowners insurance. But, as this case illustrates, it should be.

The insured had a theft from his dwelling, and a loss of nearly $27,000 was claimed for musical recording and playing equipment.

Based upon the insured's examination under oath, the insurer determined that the equipment was business property and limited the amount paid to $500, the policy limit for business property. The insured sued for breach of contract, asserting that the equipment should be covered up to the limit for his personal property (nearly $40,000).

The policy defined “business” as “including a trade, profession, or occupation.” The insured said the equipment was not used in a business, but rather “used for personal use only, perhaps accompanied by a dream that someday [he] might be able to get into the music business.” Further, he argued, the phrase “business property” left three interpretations possible: (1) the property was used exclusively in pursuit of a trade, profession or occupation; (2) the property was used sometimes in business; or (3) the property had only once been used in business but was not now.

But the appellate court agreed with the trial court, and said there was no genuine issue of material fact. Although the insured had claimed that music was “just a hobby,” his testimony under oath was that he had no occupation; he received much of the equipment in exchange for services; he performed shows where he would be paid monetary compensation; and he used the equipment to produce demos that he sent to record companies. The court added that the lack of a definition for “business property” did not render the phrase ambiguous, and so, the trial court's decision in favor of the insurer was upheld.

This case is Mack v. Nationwide Mutual Fire Insurance Company, 2005 Westlaw 1314800 (Oh. App. 6, 2005).