The difference between Actual Cash Value (“ACV”) and Replacement Cash Value (“RCV”), and whether increased costs to comply with building codes are part of RCV can be significant in cases involving a proper loss measurement determination. In Sierra Pacific Power Company v. Ram Hartford Steam Boiler Inspection & Insurance Company, 2012 U.S. App. LEXIS 15559 (9th Cir. July 27, 2012), the insured, Sierra, operated a power generation dam in California, which was insured by Hartford Steam Boiler Inspection & Insurance Company (“HSB”) and Zurich American Insurance Company (“Zurich”). The dam was destroyed by a flood in 1997, which all parties agreed was a covered loss. The district court determined that Sierra was entitled to ACV of just over $1,260,000, and that Sierra could recover RCV of $19,800,000 (presumably including $4,000,000 in preparation costs) if the dam was built within three years.
HSB and Zurich appealed the following district court rulings: (1) Sierra could recover the $4,000,000 in preparation costs, (2) RCV included costs to comply with building code changes, and (3) Sierra had three years to replace the dam to recover RCV.
The Ninth Circuit first reversed the district court’s finding that Nevada law applied, and determined that California law should apply. Id. at *4.
Turning to the policy interpretation issues raised on appeal, the policy provided valuation should be determined by “actual cash value (with proper deduction) for depreciation of the property destroyed.” Id. at *5-6. The Ninth Circuit noted that ACV under California law for a total loss is typically determined by comparable sales, but where there is no relevant data (such as comparable sales of dams), alternative approaches that are “just and equitable” may be used. Id. at *5. This includes RCV less depreciation if specified in the policy language. Id. (citing Cheeks v. Cal. Fair Plan Ass’n, 71 Cal. Rptr. 2d 568, 572 n.5 (Cal. Ct. App. 1998). Because the applicable policy provision contained the appropriate language, the Ninth Circuit determined that valuation should be determined by RCV less depreciation. As an aside, the Ninth Circuit determined that the numerical value of $1,260,000 for ACV was clearly erroneous because it did not include a proper determination of depreciation, and vacated that specific finding.
The Ninth Circuit then determined that RCV should include design fees, permitting fees and other regulatory costs necessary to rebuild the dam even though the policy excluded “loss or damage caused by or resulting from… any increase in the loss due to any ordinance, law or regulation, rule or ruling restricting or affecting repair, alteration, use, operation, construction or installation.” Id. at *8-9.
Noting that there was no Ninth Circuit authority on the issue, and a split of authority in California on whether the exclusion only excludes damages caused by a building ordinance (as held by Fire Ins. Exch. v. Super. Ct. (Altman), 10 Cal. Rptr. 3d 617, 632036 (Cal. Ct. App. 2004) or also excludes increased costs for replacement in the case of a covered loss (as held by Bischel v. Fire Ins. Exch., 2 Cal. Rptr. 2d 575 (Cal. Ct. App. 1991), the Ninth Circuit certified the question to the California Supreme Court. After the California Supreme Court declined the certified question, the Ninth Circuit chose to follow Altman. The Ninth Circuit reasoned that the law and ordinance exclusion was in the section of the policy on excluded perils, and the loss was not caused by an excluded peril. Further, the valuation section of the policy did not specify that the amount recoverable for a covered loss should be diminished by law and ordinance costs.
Finally, the Ninth Circuit determined that the policy provision limiting the loss measurement to ACV if repairs were not completed within two years of the loss was
- impossible to comply with and therefore unenforceable on public policy grounds;
- unenforceable based on a finding that the insurer had misrepresented available coverage, and delayed informing the insured of available coverage, and therefore the insurer was estopped from relying on the provision; and
- unenforceable based on the insurer’s waiver of the provision through various extensions during the claim process
This case illustrates the critical distinction between ACV and RCV, and the importance of a thorough analysis in the claim handling process of the applicable policy language, in addition to any applicable state statutes that may require specific policy language.