Insurer Cannot Deduct Depreciation for Repairs to a Partially Destroyed Building

Peltz v. Nationwide Mutual Insurance Company, January Term, 2001, No. 127 (Phila. CCP August 12, 2001), involved the interpretation of the following provision in a business owner’s policy:

d. We will determine the value of Covered Property as follows:

• At replacement cost (without deduction for depreciation), except as provided in (2) through (7) below.
  …
• If the “Actual Cash Value – Buildings” option applies, as shown in the Declarations, paragraph (1) above does not apply to Buildings. Instead, we will determine the value of Buildings at actual cash value.

The case involved a building, which was partially destroyed. Nationwide estimated the replacement costs for the building to be $42,055.00. It deducted depreciation in the amount of $5,270.09. Nationwide then paid the plaintiffs $36,784.91. In response, plaintiff sued Nationwide for breach of contract and bad faith.

Initially, Judge Herron stated that Pennsylvania law does not allow the deduction of depreciation when compensating an insured party for partial loss repairs to a building. In support of his opinion, Judge Herron cited Fedas v. Insurance Company of the State of Pennsylvania, 300 Pa. 555, 151 A. 285 (1930) and Farber v. Perkiomen Mutual Insurance Company, 370 Pa. 480, 88 A.2d 776 (1952). In both cases, the insurer failed to define the term “actual cash value” in the insurance policy. Consequently, the Fedas and Farber courts refused to allow the insurers to deduct depreciation. In fact, the Farber court invited insurance companies to “…exclude therefrom anything for which they desired not to assume liability.”

More recently, in London v. Insurance Placement Facility of Pennsylvania, 703 A.2d 45 (Pa. Super. Ct. 1997) the Superior Court upheld the Fair Plan’s depreciating the cost of repairing a building partially destroyed by fire. In that policy, the relevant provisions read as follows:

To the extent of the actual cash value of the property at the time of the loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality.

Actual cash value was defined as:

The cost to repair or replace the damaged property less deductions for physical deterioration (depreciation) and obsolescence.

In comparing the Nationwide and Fair Plan policies, Judge Herron concluded that the Nationwide policy failed to define actual cash value. Consequently, Judge Herron held that Nationwide was not permitted to deduct depreciation from compensation for repairs in the event of a partial loss to a building.

Peltz v. Nationwide Mutual Insurance Company,
January Term, 2001, No. 127 (Phila. CCP August 13, 2001)