Diminution or Repair
A first party property insurance company is only required to make the insured whole. A property insurer, when the insured decides not to rebuild and sells the damaged property without repair, is only entitled to recover the actual cash value loss. It is not entitled to the costs of repair unless the cost of repair is less than the actual cash value loss. Some insureds attempt to profit from an insured loss rather than take the actual cash value loss it agreed to when the policy was acquired.
3140 L.L.C., attempted to have its cake and eat it, sued its insurance company following water damage from a fire sprinkler in a building it owned. 3140 L.L.C. argued the insurance company was negligent or negligently represented that it needed to maintain a working sprinkler system. A jury awarded 3140 L.L.C. $351,784.58 in damages on its claims. The district court vacated the verdict, set aside judgment, and ordered a new trial. In 3140 L.L.C v. State Central Financial Services, Inc., D/B/A State Central Insurance, No. 2-1186 / 12-0434 (Iowa App. 02/13/2013) the Iowa Court of Appeal resolved the dispute.
In December 2004, 3140 L.L.C. purchased property in Keokuk that had been used as a nursing home. They paid $286,000.00 for the property. In 2007, 3140 L.L.C. purchased an insurance policy on the property through State Central Insurance (State Central). The policy, issued by Mount Vernon Insurance Company (Mount Vernon), did not provide coverage for fire sprinkler leakage.
In November 2007, 3140 L.L.C. was advised as to the necessity of maintaining a fire sprinkler in its vacant property.
On December 23, 2008, the building owned by 3140 L.L.C. incurred damage after water pipes and fire sprinklers froze and broke. 3140 L.L.C. made a claim for damages with Mount Vernon but was denied because the policy did not provide coverage for damage due to sprinkler leakage. The disputes about coverage were resolved by a partial grant of summary judgment. Two claims went to trial: one count of negligence and one count of negligent misrepresentation stemming from State Central allegedly providing inaccurate information about maintaining a working sprinkler system.
After trial a jury reached a verdict in favor of 3140 L.L.C. in the amount of $351,784.58, but found 3140 L.L.C. was forty percent at fault. Reducing the total damages by forty percent, the district court entered judgment on behalf of 3140 L.L.C. in the amount of $211,071.74.
State Central moved for judgment notwithstanding the verdict and for a new trial. Following a hearing, the district court vacated the verdict, set aside the judgment entry, and granted a new trial.
The district court determined that instruction No. 29 was inadequate because it lacked an explanation or definition of “fair market value.” The court noted that State Central did not object to the instruction, but that it initially offered a different instruction that included a definition of “fair market value.” The court concluded that it “could have prepared a better instruction by including a definition of fair market value.” However, the court made this finding after determining the jury’s verdict was contrary to the instruction. The only question on appeal was whether the jury’s verdict conformed with the evidence and the law as instructed.
Instruction No. 29 states:
“If you find that Plaintiff is entitled to damages, you will consider either ‘diminution in value’ or ‘restoration.’
“Damage for diminution in value is the difference in the value of the property immediately before the injury and its value immediately after the injury.
“Damage for restoration is the reasonable cost of repairing the property by restoring it to the condition it was immediately before the injury plus the reasonable value of the use of the property for the time reasonably required to complete its repair.
“If the cost of restoration is greater than the diminution in value, the Plaintiff is limited to recovering only the amount of damages for diminution in value.”
“There is an exception to this limitation if:
“1. The cost of restoration is not unreasonably greater than the diminution in value; and
“2. The Plaintiff retains the property because it is personal to the Plaintiff, and the property will actually be restored to its original condition.
“If these propositions are proved by the Plaintiff, damages may be awarded for restoration even if it is greater than the amount of the diminution in value. If these propositions are not proved by the Plaintiff, then the damage award is limited to the amount of diminution in value.”
The district court found the substantial evidence presented at trial was that diminution would result in damages between $0 and $115,000, whereas “the cost of repairing the property by restoring it would amount to $351,784.” Because the jury found the total amount of 3140 L.L.C.’s damages was $351,784.58, the trial court concluded the jury chose to use the cost of restoration, which was contrary to the instruction because the cost of restoration was more than the diminution in value.
The court of appeal concluded that the exception set forth in instruction No. 29 was not followed. Fixing the amount of damages is a function for the jury; therefore, a court is always loath to interfere with a jury’s verdict. When reviewing an allegation that a jury verdict is excessive, the evidence is viewed in the light most favorable to the plaintiff.
A jury award must be reduced or set aside only if it is
- flagrantly excessive or inadequate;
- so out of reason as to shock the conscience;
- a result of passion, prejudice, or ulterior motive; or
- lacking evidentiary support.
Where a verdict meets this standard or fails to do substantial justice between the parties, the court must grant a new trial or enter a remittitur.
In 3140 L.L.C.’s closing argument, its attorney told the jury that the amount of damages attributable to the fire sprinkler leak would be between the difference in value of the building before the damage ($590,000) and the amount it sold for after the damage ($475,000)-a difference of $115,000-and the cost of restoration, which was $347,500. The jury found 3140 L.L.C. suffered $351,784.58 in damages, an amount in keeping with the cost of restoration. This is contrary to instruction No. 29, which required the jury to award damages for the diminution of value if that amount was less than the cost of restoration.
The undisputed evidence shows the diminution in value would be between the fair market value of the building prior to the damage and what it was sold for after the damage. The evidence places the fair market value of the building before the damage at either $475,000-the November 12, 2008 offer price – or the value estimate of $590,000. The difference then would be either $0 or $115,000, depending on which figure the jury chose.
The court of appeal concluded that an award of damages between $0 and $115,000 was supported by the evidence. The jury’s verdict of $351,784.58 was not supported by the evidence or the law. Where a verdict is the result of passion and prejudice, a new trial is warranted. However, where in the absence of passion and prejudice the verdict is merely excessive because it is not supported by sufficient evidence, justice may be effectuated by ordering a remittitur of the excess as a condition for avoiding a new trial.
The evidence supports an award of damages in the amount of $115,000 less forty percent, or $69,000. The court of appeal, therefore, conditionally affirmed the trial court’s grant of a new trial for excessive damages and conditioned its decision on the plaintiffs, within fifteen days of the issuance of the order must file with the clerk of the district court a remittitur of all damages in excess of $69,000, the judgment shall be reversed. If the plaintiff does not file a remittitur, the district court would be affirmed and a new trial would be granted.
This is only tangentially an insurance case. It is a damages case. The Iowa court accepted the fact that actual cash value of real property that is not repaired is the fair market value of the property before loss less the fair market value after loss. In this case the plaintiffs suffered real damage to their property, sold it without repair for almost twice what they paid for it, and then had the unmitigated gall to demand the full cost of repair as the damages due from the insurer. The jury agreed to punish the insurer and compel it to pay more damages than it owed.
The trial court and the Iowa court of appeal saw through the error and gave the plaintiffs one of two choices: accept the remittitur and take the money or retry the case knowing that at the next trial the instructions will follow the requirements of the court of appeal so that the chances of getting more damages are slim and there would be a possibility of getting nothing.
© 2013 – Barry Zalma
Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He 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 founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Arson for Profit” and others that are available at www.zalma.com/zalmabooks.htm.