Determining the value of destroyed property for insurance purposes is no mean feat. If the insured and the insurer disagree about the amount of a policy payout, a lawsuit may be on the horizon. That's where the broad evidence rule comes into play. While an appraisal is the common method of settling differences between insurer and insured, many times a claim ends up in court.
The broad evidence rule is rooted in case law but may be generalized as the idea that a fact-finder may consider evidence from multiple sources in determining value of lost property at the time it was destroyed. Commonly considered variables are economic value, fair market value, depreciation and deterioration, structural or functional obsolescence, and others. Courts will generally consider virtually any common-sense argument and typically award in favor of the insured. While not defined in the standard insurance policy, some states have tried to ward off potential litigation by defining "actual cash value", particularly with respect to homeowner insurance policies. While the definitions may differ by state, in general the definitions include the language that actual cash value means (or is calculated as) the amount or cost to repair or replace covered property at the time of loss or damage with material of like kind and quality, less some form of depreciation or deterioration. Some states will even include a deduction for obsolescence. Typically, an insurer will compute actual cash value as replacement cost less depreciation. The National Association of Insurance Commissioners (NAIC) has defined actual cash value as "the amount it would take to repair or replace damage to a home and its contents after depreciation".
Despite this, there are some grey areas that can arise in the claims settlement process that can lead policyholders or their attorneys to seek settlement under the broad evidence rule. For example, an insurer may deduct for wear and tear of property based on photographic evidence, or use information provided from homeowner or witness statements as to the condition of the property at the time of loss in the claims settlement process.
Some states have adopted the Broad Evidence rule as the standard for determining the value of a property regarding insurance claims. These states assert that the broad evidence rule is the best way to ensure that a policyholder is compensated fairly when they have sustained a loss.
We will take a look at a few notable cases where the broad evidence rule proved to be the prevailing determination.
In Agoos Leather Cos. V. American & Foreign Ins. Co., when an insurer disputed an award to the insured after a building fire, (342 Mass. 603 (Mass. 1961)), the Supreme Judicial Court of Massachusetts ruled that "[b]oth fair market value and replacement cost are permissible standards for determining fire losses but they are standards and not shackles." The mere existence of uncertainty as to the actual cash value of the lost buildings was insufficient to defeat the award, particularly considering that "…damages can seldom be proved with the exactness of mathematical demonstration."
Later, in Westfield Realty Trust v. Cont'l Cas. Co., the parties disputed the value of the plaintiff's property at the time it was burned down (1995 Mass. Super. LEXIS 377). One adjuster stuck to the "replacement cost less depreciation" method, but the insurer wanted to try other methods in order to decrease exposure. A second adjuster evaluated the property using two other standards—income capitalization and market/sales comparison—in addition to the replacement less depreciation method; based on comparisons between the three, he "concluded that the market approach was the most reliable approach." On appeal, the Superior Court of Massachusetts found that reliance on the second adjuster's valuation methods was neither unfair nor unreasonable.
Then, in O'Connor v. Merrimack Mut. Fire Ins. Co., the Appeals Court of Massachusetts ruled that the use of the term "actual cash value" in a fire insurance policy did not create a "one size fits all" standard for property valuation (897 N.E.2d 593, 2008). The Court pointed out that the plaintiff "had no trouble accepting the terms of [his] policy," particularly because the plaintiff's understanding of "actual cash value" only changed after a Merrimack manager sent a letter informing the plaintiff that his property was underinsured.
Based on the applicable case law, the specifics of the broad evidence rule are not written in stone. Rather, this rule has ample flexibility for determining the cash value of property at the time of loss. Massachusetts courts have consistently refused to make a finding of bad faith on the part of the insurer simply because the insurer came up with a lower value for the lost property that the insured based on the valuation method used.