Written by Attorneys Robert T. Horst, Robert M. Runyon, III and Sheryl H. Berman

Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.

The Superior Court of Pennsylvania recently considered the ability of an insurer to withhold depreciation on partial building loss claims in the absence of clear, unambiguous policy language defining “actual cash value”. In Kane v. State Farm, et al., 2003 Pa. Super. 502, (December 22, 2003), the Superior Court concluded that in partial loss situations, depreciation may permissibly be withheld in two instances: 1) when the term “actual cash value” is clearly defined; or 2) if the policy does not explicitly define actual cash value, when the policy predicates payment of replacement cost upon repair or replacement of damaged property. Therefore, even in the absence of an unambiguous definition of “actual cash value” within the policy, depreciation may be taken on partial losses when the intent of the parties regarding the manner and timing of the loss payment is clearly expressed.

In Kane, counsel for thirty-two (32) plaintiffs brought a class action suit against twenty-eight (28) separate insurers alleging breach of contract, as well as violations of Pennsylvania’s bad faith statute and Unfair Trade Practices and Consumer Protection Law, based on the theory that Pennsylvania law does not permit an insurer to deduct recoverable depreciation in partial building loss situations. Following dismissal of nineteen (19) of the original defendants (NLdH represented four (4) of the nineteen (19) defendants voluntarily dismissed by plaintiffs’ counsel after initial pleadings were filed), the Bucks County Court of Common Pleas granted preliminary objections in favor of the remaining defendant carriers and dismissed the complaint in its entirety, holding that depreciation may be deducted from a partial building loss if the policy language supports the insurer’s rights to do so. In addition, the court found the named plaintiffs’ failure to actually undertake any repairs before making claim for the withheld depreciation fatal to their causes of action.

On appeal, the Superior Court determined that each of the policies at issue provided for replacement cost coverage, but that all, except one, required the insured to first repair or replace the damage before full replacement cost value would be paid. In dicta, the court summed up the relevant Pennsylvania case law on actual cash value by stating, “London[i] stands for the proposition that, although Fedas[ii] and Farber[iii] remain viable, explicit policy language may avoid their effects.” The court also distinguished Kane from Fedas, Farber and London, since the insurers in the present case had not denied liability for replacement cost, but paid the actual cash value of the damage and premised the timing of the compensation for replacement cost benefits on when the replacement or repair was completed.

The policies that defined the term “actual cash value” to include deductions for depreciation were found to unambiguously allow the insurers to deduct depreciation until repair or replacement is made. Notably, the court reached the same conclusion as to those policies lacking a specific definition of actual cash value, except as to one carrier. While actual cash value is not defined, the language of these policies clearly indicates that only actual cash value will be proffered “until” or “unless” repair or replacement is made. Moreover, with respect to these policies, the court had no concern, as was present in Fedas and Farber, that the insureds would not be made whole, finding that the issue involved the timing of the loss payment, not the extent. Therefore, the court conditioned an insurer’s right to deduct depreciation and pay actual cash value in a partial building loss not on whether the policies defined actual cash value, but on whether it is clear that that depreciation will be withheld until or unless the insured undertakes repair or replacement of the damaged property.

The Superior Court granted the appeal and reversed as to the insurer that issued a policy which defined actual cash value, but contained an endorsement which stated that dwelling coverage would be settled on a replacement cost basis without deduction for depreciation. This endorsement differed from the standard “replacement cost” endorsement in that it did not contain language stating that only “actual cash value” would be proffered “until” or “unless” repair or replacement is made. Despite clear policy language in the primary coverage form which provided that actual cash value included a deduction for depreciation, the court found that the interrelation between the primary policy language and the Dwelling Replacement Cost Guarantee Endorsement resulted in an ambiguity which precluded dismissal at the preliminary objection stage. As a result, the court remanded the case to Bucks County, where it will continue to be litigated.

In the wake of the Kane decision, the current state of Pennsylvania law suggests that depreciation deductions may be taken for partial losses when the policy provides a clear and explicit definition of actual cash value, or when the policy clearly predicates payment of these benefits solely upon condition of repair or replacement (“unless” or “until” repair or replacement is made). Appellants (the original plaintiffs) may choose to move for a rehearing by the Superior Court en banc or they may appeal the granting of Appellee’s preliminary objections to the Supreme Court of Pennsylvania by filing a petition for allocatur within thirty (30) days of the entry of a final order of the Superior Court.