Insured’s ACV Claim Reaches For The Stars, But Finds Them Falling…

Case: Greenspoint Investors, Ltd. v. Travelers Lloyds Ins. Co.
U.S. District Court, Southern District of Texas
2015 U.S. App. LEXIS 293

This Texas case arose out of Hurricane Ike, which damaged Greenspoint’s roof, skylight and windows and allowed significant amounts of water into its building. In what is not an altogether uncommon scenario, the Insured formed a new company, Ike Restoration, to do its own repair work and restore the building. There was no written contract; Ike Restoration simply invoiced Greenspoint for the repairs. Travelers paid $2.3 million for building repairs, but then requested evidence of the Insured’s actual repair costs, which the Insured declined.

Several recurring insurance claim valuation issues came before the court on motions in limine, which the court handled as motions for summary judgment. While all of these were reviewed in context of the Insured’s ACV claim in this instance, the court’s rulings are instructive.

What is ACV anyway?

The relevant Travelers language provided the Insured the option of repairing damaged property and receiving RCV (replacement cost value) or choosing not to and receiving ACV (actual cost value). Greenspoint elected to receive ACV on certain damaged items which it chose not to replace or repair. The rub came when Travelers requested documentation of the Insured’s actual repair costs. Greenspoint argued that ACV should be determined without consideration of the actual cost of repairs and that it had no obligation to disclose these costs to Travelers. Thus, the Insured sought an instruction that the jury could not be informed of the actual cost of repairs in determining ACV because it was irrelevant.

The court noted that the policy, as is often the case, did not define ACV, but then referred to various Texas courts that had. Relying principally on Ghoman v. N.H. Ins. Co, 159 F.Supp.2d 928 (N.D. Tex. 2001), the court acknowledged that under Texas law, ACV was synonymous with “fair market value.” The Gohman court defined fair market value as the price a willing purchaser was to pay a willing owner when the owner was under no requirement to sell. The court noted that fair market value could be the established by comparable sales, income capitalization, or the cost of repair or replacement, less depreciation. To establish the cost of repair or replacement less depreciation, the Gohman court instructed the parties to consider “any cost that an insured is reasonably likely to incur in repairing or replacing a covered loss.” Thus, the court concluded that a contractor’s overhead, profit and sales tax were costs likely to be incurred even though the Insured performed its own repairs and did not actually incur such costs. Effectively, the Insured was not to be penalized for doing its own repairs.

In another case, however, Dwyer v. Fid. Nat’l Prop. & Cas. Ins. Co. 428 Fed. Appx. 270 (5th Cir 2011), the Fifth Circuit concluded that the inclusion of overhead and profit was improper where the insured had sold the property in its unrepaired state and therefore could not incur those costs.

After canvassing additional cases, the court concluded that the linchpin in the calculation of ACV replacement costs appears to be whether the challenged cost is “reasonably likely to be incurred.” Thus, the court concluded that the jury could consider the replacement cost at the time of the loss, which was the cost reasonably likely to be incurred in repairing or replacing the damaged property, less depreciation. Because courts have concluded ACV is synonymous with fair market value, the court also concluded that the damaged property’s market value could be relevant to the determination of ACV.

Then, turning to the Insured’s argument that actual cost of repair was irrelevant and that the Insured was not required to disclose to its insurer the actual costs incurred, the court concluded that although Travelers usually paid ACV based on estimates, it was still entitled to ask for Ike Reconstruction’s actual costs and expenses before paying the ACV claim. Noting that the Policy required the Insured to provide complete inventories of damaged and undamaged property as well as the Insured’s duty to cooperate with the investigation and settlement of the claim, the court concluded that in determining ACV, actual expenses incurred making repairs could be relevant in evaluating the validity of the ACV estimate and thus, the Insurer was entitled to the actual cost information it sought and that information was relevant and admissible.

Repairs to Tenant’s Space

Pushing its ACV claim to the limits, the Insured also made an ACV claim for damages to a Fiber Optics Room which was leased to a third party. The court noted that the lease allocated responsibility for nonstructural repairs and maintenance to the tenant. Nevertheless, the Insured made repairs to the drywall, tiling and insulation, arguably restoring the space to its prior condition. Although repairs had been made and the tenant had not experienced significant issues thereafter, the Insured’s expert issued a report detailing $6.2 million of ACV damages to the Fiber Optics Room which included, in part, the temporary relocation of the tenant’s fiber optics equipment while work was to be performed. The court, noting that the Policy insured the Insured’s damaged property, not property belonging to the tenant, concluded the cost of temporarily relocating the tenant could not be included in the Insured’s ACV claim. Moreover, as the Insured was only responsible for the shell and slab under its lease, the Insured had no legal obligation to repair or replace the damaged drywall or flooring which, pursuant to the lease was deemed property of the tenant. The Insured could only include those amounts that it was reasonably likely to incur as a result of the damage, which did not include the repairs to the drywall or flooring, as such costs were properly allocated to the tenant.

Inflation Guard, Extra Expense, Expediting and Code Upgrades

Notably, the court also rejected the Insured’s argument that the Policy’s Inflation Guard continued to adjust the limits upward as part of the Insured’s ACV claim until it was fully and finally resolved. Rather, the court concluded that the inflated limit was established at the date of loss. Also rejected were the Insured’s arguments that it was entitled to ACV for Extra Expense Coverage, Expediting Expenses and Code Upgrades. The court found that only costs actually incurred by the Insured were recoverable under these provisions and that the Insured could not include such in its ACV claim.

Bad Faith & Deceptive Trade Practices - Policy Misrepresentation

In the coup de grâce, the court concluded that no evidence would be permitted regarding an alleged misrepresentation by the Insurer under Texas’ bad faith or deceptive trade practices statutes. Greenspoint had argued that a chart presented to it during the adjustment process listed other damage projects for which emergency repairs were purportedly conducted at a much lower cost per square foot was misleading and caused the Insurer to undervalue the Insured’s damages. The Insurer allegedly relied on the chart to assess emergency repair costs at approximately $550,000, while the Insured claimed almost $2 million. The chart was used (apparently unsuccessfully) to convince the Insured its estimated costs were too high. The Insured complained that Travelers represented to the Insured that it must show actual costs incurred to receive the ACV benefit, which the Insured claimed was not the state of the law. However, relying on Texas Supreme Court precedent established in Tex. Mut. Ins.Co. v Ruttiger, 381 S.W.3d 430 (Tex. 2012), the Court found that the alleged untrue statement must be regarding the policy or be a statement about the policy which misleads the insured, and concluded that the alleged misstatements in the chart were not statements about the policy at all, only about the valuation. Thus, the Insured’s misrepresentation claim could not stand. However, the court agreed to allow introduction of the chart as potential evidence related to Traveler’s alleged lack of good faith in effectuating a prompt, fair and equitable settlement, alleged refusal to pay a claim without reasonable investigation, and allegations that it engaged in some unconscionable act or course of action.