McAnarney v. Newark Fire Ins. Co., 159 N.E. 902 (N.Y. 1928) is the leading case on this question. It involved the fire destruction of an old brewery that could not be used because of the National Prohibition Act. The building apparently had no other economic use, and the owner had advertised it for sale, unsuccessfully, for a fraction of the amount of insurance carried. In striking a compromise position between the insured and the insurer, the court said, "Where insured buildings have been destroyed, the trier of fact may, and should, call to its aid in order to effectuate complete indemnity, every fact and circumstance which would logically tend to the formation of a correct estimate of the loss. It may consider original cost and cost of reproduction; the opinions upon value given by qualified witnesses; declarations against interest which may have been made by the insured; the gainful uses to which the buildings may have been put; as well as any other reasonable factor tending to throw light on the subject." In so reasoning, the court decided on a value between replacement cost less depreciation and the market value of the building.

Adoption of the Broad Evidence Rule

Oklahoma

The second case addressed by the Oklahoma Supreme Court, Branch v. Farmers Ins. Co., Inc., 55 P.3d 1023 (Okla. 2002) reached a similar conclusion in a claim involving loss to a roof. Here, the court said that labor costs for a new roof were replacement costs, and therefore could be depreciated. However, in this particular case, the court said that the layer of roofing that had to be torn off to lay the new roof was "debris" within the meaning of the policy provision for reasonable expense to be paid for debris removal, and therefore this cost was not subject to depreciation. Oklahoma follows the broad evidence rule in determining actual cash value.

All relevant factors—purchase price, replacement cost, appreciation or depreciation, the age of the building, the condition in which it has been maintained, and market value—are to be considered, said the court.

Iowa

Olson, the insured, owned a grain storage building insured for $160,000 with a $500 deductible. The building was damaged by hail, and the replacement cost of the damage was determined to be $95,040. The insurer estimated repair at $94,576, deducted depreciation and the deductible, and offered $57,365.60. Olson sued and noted in his affidavit that he had been offered $200,000 for the building shortly before the damage occurred. Further, a certified appraiser stated the building had a fair market value of $200,000. The insurer pointed to its standard practice of defining actual cash value as "cost to repair or replace less depreciation." The court noted that in earlier cases to come before it, it had been urged to adopt the broad evidence rule, in which every fact for forming a correct estimate of a building's value could be considered. The court went on to say that it "had no particular quarrel with that definition," but stated that "actual cash value must still be measured as an economic unit, i.e., related to what, in terms of value, one could receive for his or her property. Fair market value is a term which has been used and is generally understood by experts and lay people alike, and which may be found by employing, if you will, the broad evidence rule…We continue to approve that definition for 'actual cash value' wherever it is used in a policy of property damage insurance." The court found that there was no evidence that repairing the building would cause it to exceed its actual cash value of $200,000, and thus awarded the repair cost of $95,040 less the deductible, for a judgment of $94,540. In this, the court held that the broad evidence rule was the third rule to be used, following market value or replacement cost, if there was no definition of actual cash value in the policy in question.

Indiana

Travelers insured Armstrong’s farmhouse, which suffered severe interior fire damage. The insurer's claims adjuster estimated the cost of repairs, but offered to pay an amount substantially less than the estimated cost of repairs. The insurer claimed the phrase "actual cash value" meant replacement cost minus depreciation. The insurer also contended that the award of punitive damages was an error in an action for breach of contract. The appellate court affirmed the judgment in favor of the insured because the phrase "actual cash value," within the context of a fire insurance policy, meant an amount of money, within the policy limit, sufficient to restore, repair, or replace the property destroyed. The appellate court also held that punitive damages were properly awarded because the conduct of the insurer independently established fraud, malice, gross negligence, or oppression. The appellate court held that actionable fraud need not be proved to support an award of punitive damages.

The judgment in favor of the insured was affirmed because the indemnity aspect of the insurance policy necessarily included a functional restoration of the insured to as good a condition, so far as practicable, as the insured would have been in if no fire had occurred. The court held punitive damages were properly awarded based on an exception to the rule that punitive damages were not available in contract actions.

Massachusetts

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 than the insured based on the valuation method used.

Demolished Buildings

In the first case, Aetna State Bank v. Maryland Cas. Co., 345 F. Supp. 903 (N.D. Ill. 1972), suit was brought by the mortgagee, Aetna. The insured purchased a complex of buildings on which he had a mortgage and then entered into an agreement to have the complex demolished. The buildings were destroyed by fire after demolition had begun. Although the court was asked to consider several questions concerning the liability of the insurers that had written the coverage on the buildings, the main question was to determine the actual cash value and, hence, the amount of liability of the insurers.

The court held that even though there was coverage under the policies, the insurers were not required to pay for the loss because the buildings had no value. The court said, "The finding, in legal terms, of liability on the part of the defendant insurance companies does not ipso facto mean that there is a value that can be collected on policies in practical terms."

Commenting further on the application of replacement cost less depreciation test to actual cash value the court said, "It would be interesting to apply a principle which includes a replacement value to a case where the insured was himself already in the process of paying a wrecker to do what the fire did for him for nothing. To allow almost a quarter of a million dollars to be paid for buildings that were valueless and whose duration of existence was governed solely by the rapidity of the swing of the wrecker's ball which was operating at the behest of the insured and with the acquiescence of the mortgagee would indeed produce a grossly inequitable result."

The companion case, arising out of a similar fact situation, is Garcy Corp. v. Home Ins. Co., 353 F.Supp. 329 (N.D. Ill. 1973). The owner in this case brought suit on the same set of circumstances as did the mortgagee in Aetna State Bank but with the additional claim that he should recover for the largest building of the complex, a seven-story building, on which demolition had not begun.

The District Court ruled that since wrecking had begun under a contract that called for demolition of all the buildings, none had any value, and the insured, therefore, could show no loss. The decision, however, was appealed by the insured and reversed by Garcy Corp. v. Home Ins. Co., 496 F.2d 479 (7th Cir. 1974).

Several facts that had not been considered by the lower court seem to have had a significant bearing on the ultimate decision by the court of appeals. They are as follows: it was in use as a warehouse for inventory and equipment; it had not been stripped of salvageable material or prepared for demolition; the insured hoped to sell the building weeks before the wrecking crew would reach it and could have halted demolition if it had been sold. It was also shown that the building was listed with real estate brokers, and an appraisal made at the request of a prospective buyer placed a value on the building of $633,532. These factors, particularly the last, were influential in deciding the final outcome.

The court reasoned that since the insured was using the intact seven-story building as a warehouse and was trying to sell it, it had economic utility; in short, the building was not in process of demolition. Since the insurer did not contest the value established by the appraiser, and because the appraisal value exceeded the total coverage, the insured was able to recover the latter amount.

One further case, Board of Education of Hancock County v. Hartford Fire Ins. Co., 19 S.E.2d 448 (W. Va. 1942), involved a school building that had been replaced by a new building, was not being used, and was scheduled to be demolished. Here again there was a total loss, and the state supreme court held that the factors of obsolescence justified a recovery of a smaller amount than replacement cost less depreciation.

None of these cases—and this is also true of cases in other states approving this principle—lays down a rigid rule for measuring the effect of obsolescence. This is, essentially, a practical matter. The important point of these cases is the principle (quoting from the opinion in McAnarney) that "every fact and circumstance which would logically tend to the formation of a correct estimate of the loss," including the economic value of the property, should be considered in determining the actual cash value.

The Supreme Court of Wisconsin noted that the broad evidence rule "gives considerable leeway and latitude to trier of facts to determine actual cash value of insured property," and thus "gives to the trial forum the right to consider in a given case all facts reasonably tending to throw light upon the subject." In Doelger and Kirsten, Inc. v. National Union Fire Ins. Co., 167 N.W.2d 198 (Wisc. 1969), the insured had a fire loss in which wooden patterns used for making alligator shears were destroyed. At the time of the loss, the patterns were over thirty years old and had not been used for some time prior to the loss. The insured held that the proper measure of the loss was replacement cost; an expert testified that the reproduction cost was $12,200. The insurer countered that present market value was the correct measure and because the patterns were obsolete they were of no value at all. The trial court utilized replacement cost minus physical depreciation and minus obsolescence in determining a value of $4,840. The insurer appealed the decision. In its review, the court looked with approval at McAnarney, discussed earlier, and noted that "under the 'broad evidence rule,' we need not find the route traveled by the trier of fact in this case to be the only route that could have been traveled. We need only to find it a proper and acceptable one. This we do."

Clearly, where there is an obvious case of obsolescence and limited or no economic usefulness to the insured property, the only safe procedure is to discuss the matter with the underwriters and try to come to an agreement—when the insurance is written, instead of after a loss—as to some reasonable measure of value.

Broad Evidence Rule and Personal Property

Stocks of merchandise, raw materials, etc., often do not suffer any depreciation. In such a case, the proper measure of recovery is the cost of replacing them at the current market value, less any salvage; merchandise that has become shopworn and deteriorated in value should, of course, be subject to depreciation. Here again, the measure of recovery might be more or less than the original cost. It should be remembered, however, that the standard of recovery is the cost to the insured—not the price at which he or she expects to sell it to customers. Rules in most states permit use of a market value or selling price clause which converts, for some insureds such as manufacturers, finished stock from actual cash value to "selling price less discounts and unincurred expenses."

A case before a Texas court took a slightly different approach. Here, the court said that "factors, including, but not limited to market value, may be considered, with exception that where there is no recognized market value, market value should be excluded and determination based on remaining factors." This approach is similar to Doelger, discussed earlier. The court went on to say "[t]he courts have not abandoned the consideration of either market or reproduction or replacement values in arriving at actual value to the insured, but evidence of those values may be used as a guide in making that determination rather than a shackle which compels strict adherence thereto." In this case, Mew v. J & C Galleries, Inc., 554 S.W.2d 249 (Tex. App. 1977), the insureds lost considerable property, consisting of jewelry and antiques, in a burglary. The dispute turned around proper valuation for the items, since the insureds had purchased them in order to later sell them at auction. The court agreed that evidence as to purchase price and assigned value of the property was sufficient to show actual cash value.

Occasionally, a piece of personal property may be impossible to replace, as was the case in Iowa Nat. Ins. Co., v. City of Osawatomie, Kan. 458 F.2d 1124 (10th Cir. 1972). Power generating equipment was damaged in a fire. The estimated cost of repairs was $72,000. This type of equipment was no longer being manufactured, so replacement cost with identical equipment was out of the question. Instead, the insured had an outdoor substation constructed to replace the destroyed property. The cost was $60,500, and the insured experienced considerable betterment. Not only did the new equipment have a life expectancy twenty years longer than the old equipment, even when new; the new equipment was also considerably more efficient with twice the capacity.

The insurance company felt that it was entitled to a substantial depreciation from the $60,500 cost. But the court, looking at the $72,000 estimate for repairing the old equipment, agreed with the lower court that the insured's good fortune was not to be shared with the insurance company. That is, at $60,500, the insurance company was paying less than it would have had to pay to repair the damaged equipment ($72,000). That it was cheaper for the insured to buy better equipment than to repair the old "is not a factor to be balanced in the insurer's favor."

Conclusion: