More on the Dam Case

ACV Judgment Limited to ACV and Not Future Replacement Cost

Depending on the wording of an insurance policy actual cash value (ACV) is a method of determining the amount payable to an insured on a replacement cost policy even if the insured does not replace or before the insured is able to replace. In California, if the policy has no definition of ACV it is determined as the difference between the fair market value (FMV) before a loss less the FMV after a loss. When the policy defines ACV as replacement cost less physical depreciation that is ACV and FMV is not considered.

In Sierra Pacific Power Company v. Hartford Steam Boiler Inspection & Insurance Co. and Zurich American Insurance Company, United States Court of Appeals, Ninth Circuit, 2016 WL 7422949 (12/23/2016) a long time litigation and appellate decisions seems to have ended with a dispute over the right to prejudgment interest.

FACTS

After the Farad Dam was destroyed in 1997, its operator, Sierra Pacific Power Company (“Sierra”), brought this action against the Hartford Steam Boiler Inspection & Insurance Company and Zurich American Insurance Company (the “insurers”), seeking a declaratory judgment about insurance coverage. In a prior appeal, we affirmed the district court’s holding that Sierra could recover the actual costs of reconstruction if it timely opted to rebuild the Dam. [Sierra Pac. Power Co. v. Hartford Steam Boiler Inspection & Ins. Co., 490 F. App’x 871, 879 (9th Cir. 2012) and The Dam Case]. The Ninth Circuit remanded to the district court to calculate the amount due to Sierra under the insurance policies if it chose not to rebuild — Actual Cash Value (“ACV”) — by deducting “the appropriate depreciation” from the estimated cost to rebuild the Dam of $19,800,000.

On remand, the court found the appropriate depreciation to be 50% on the Dam and 5% on a wing wall, and determined an ACV of $12,216,600. The court awarded prejudgment interest to Sierra both on the actual costs of reconstruction and the ACV.

Sierra and the insurers each timely appealed.

ANALYSIS

The district court’s depreciation findings are factual determinations, see Jefferson Ins. Co. v. Superior Court, 475 P.2d 880, 883 (Cal. 1970), and therefore is reviewed for clear error. The evidence supported the district court’s findings. Patrick Jeremy, an experienced insurance adjuster with personal knowledge of the Dam, testified without objection to the depreciation rates based on his knowledge of “the last time [the Dam] was replaced and how long they had been lasting in the past.” The Ninth Circuit’s review of the record did not find a “definite and firm conviction that a mistake has been committed.”

The Ninth Circuit rejected the insurers’ argument that Sierra, should it choose to rebuild the Dam, is limited to a payment of $19,800,000. That figure is the present estimated cost to rebuild, not the actual cost, which has not yet been incurred. The district court held before the first appeal that “[t]he policies of insurance provide Sierra with full replacement cost coverage,” subject to policy limits.

The insurers argue that Sierra waived any claim to prejudgment interest by not asserting that claim after the district court entered its original judgment. That argument is correct with respect to the court’s award after remand of prejudgment interest on the actual costs of reconstruction. Because the Ninth Circuit affirmed the district court’s judgment as to those costs and Sierra made no claim for prejudgment interest, Sierra may not now seek to expand the prior ruling.

However, the district court’s award of prejudgment interest on the ACV was affirmed. At oral argument, counsel for the insurers stated that their only contention was that Sierra had waived any right to prejudgment interest on the ACV by not seeking it before the remand. A party may seek an award of prejudgment interest for the first time after the entry of judgment and because the district court’s initial ACV award was less than the applicable deductibles, Sierra plainly had no occasion to seek prejudgment interest before the entry of a new judgment after our remand. Similarly, the award of prejudgment interest on the ACV does not exceed the scope of the remand.

The district court’s judgment as to the ACV and its award of prejudgment interest on that amount was affirmed and the award of prejudgment interest on future reconstruction costs.

ZALMA OPINION

Some lawsuits seem to go on and on over many years. This Dam case is no exception to the rule. An insured can waive an award of prejudgment interest but it can’t waive prejudgment interest it did not know about. The earlier appeal resolved the issue with regard to ACV but not FMV or Replacement Cost. Hopefully, this case that started with a 1997 claim is finally resolved.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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