Sixth Circuit Holds That Market Crash Cannot Be Considered in Determining ACV

In Whitehouse Condo. Group, LLC v. Cincinnati Ins. Co., 2014 U.S. App. LEXIS 11708 (6th Cir. June 17, 2014), the insured condominium building located in Flint, Michigan was destroyed by a fire. The parties disagreed over the method of calculating actual cash value. The insurance policy defined actual cash value to mean “replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.” The parties differed primarily over the meaning of “obsolescence.” The carrier argued the term obsolescence included economic obsolescence or a decrease in market value. The insured contended the term obsolescence only referred to functional obsolescence or that it was no longer useful. Under the insurer’s definition the actual cash value of the property was $1,187,660.38, but under the insured’s definition the actual cash value was $2,767,730.00.

To determine the definition of obsolescence, the Sixth Circuit found that Michigan will give undefined terms in the policy their commonly used meaning. The Sixth Circuit consulted several dictionaries to determine the commonly used meaning of obsolescence. The Sixth Circuit found that three dictionaries: Merriam-Webster, Oxford Dictionaries, and Random House Webster’s College Dictionary, defined obsolescence to only include “functional obsolescence.” These dictionaries defined the word to mean “out of date” or “no longer used.”

The Sixth Circuit then reviewed Black’s Law Dictionary, which included both economic obsolescence and functional obsolescence in its definition of obsolescence. The insurer argued that the term in the policy should be interpreted to include all possible definitions. The Sixth Circuit rejected that argument again finding that Michigan required that each term be given its common definition and not any special meaning. The Sixth Circuit followed the laymen’s dictionaries and found that the term obsolescence did not include economic obsolescence or decreased market value.

The Sixth Circuit further found that the term did not include economic obsolescence because the other terms listed, “depreciation, age, and condition” all reflected something inherent in the building and not external market forces. Last, the Sixth Circuit analyzed the reasonable expectations of the insured. It found that “the insured would not likely believe, based solely on the term obsolescence, that she was purchasing insurance that included a deduction for declines in market value.” The Sixth Circuit affirmed judgment for the insured.

- See more at: http://www.traublieberman.com/first-party-coverage/2014/0721/4836/#sthash.5kwKf0OM.dpuf

In Whitehouse Condo. Group, LLC v. Cincinnati Ins. Co., 2014 U.S. App. LEXIS 11708 (6th Cir. June 17, 2014), the insured condominium building located in Flint, Michigan was destroyed by a fire. The parties disagreed over the method of calculating actual cash value. The insurance policy defined actual cash value to mean “replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.” The parties differed primarily over the meaning of “obsolescence.” The carrier argued the term obsolescence included economic obsolescence or a decrease in market value. The insured contended the term obsolescence only referred to functional obsolescence or that it was no longer useful. Under the insurer’s definition the actual cash value of the property was $1,187,660.38, but under the insured’s definition the actual cash value was $2,767,730.00.

To determine the definition of obsolescence, the Sixth Circuit found that Michigan will give undefined terms in the policy their commonly used meaning. The Sixth Circuit consulted several dictionaries to determine the commonly used meaning of obsolescence. The Sixth Circuit found that three dictionaries: Merriam-Webster, Oxford Dictionaries, and Random House Webster’s College Dictionary, defined obsolescence to only include “functional obsolescence.” These dictionaries defined the word to mean “out of date” or “no longer used.”

The Sixth Circuit then reviewed Black’s Law Dictionary, which included both economic obsolescence and functional obsolescence in its definition of obsolescence. The insurer argued that the term in the policy should be interpreted to include all possible definitions. The Sixth Circuit rejected that argument again finding that Michigan required that each term be given its common definition and not any special meaning. The Sixth Circuit followed the laymen’s dictionaries and found that the term obsolescence did not include economic obsolescence or decreased market value.

The Sixth Circuit further found that the term did not include economic obsolescence because the other terms listed, “depreciation, age, and condition” all reflected something inherent in the building and not external market forces. Last, the Sixth Circuit analyzed the reasonable expectations of the insured. It found that “the insured would not likely believe, based solely on the term obsolescence, that she was purchasing insurance that included a deduction for declines in market value.” The Sixth Circuit affirmed judgment for the insured.

 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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