What’s the Damage?
Properly evaluating real and personal property claims.
When a defense team pulls up to a loss, often there is one question on the agenda: “Did we do it?” We often write until our fingers bleed about how to scrutinize the issue of fault and the requirements to prove such. At the same time, we also know that no matter how confident parties are in their innocence, they can still be sued, and fault ultimately may be determined by a jury or other fact-finder. While liability issues are always at a case’s forefront, the issue of damages should never fall by the wayside.
Property damage claims generally fall into one of two categories: real and personal. From the defense perspective, both categories should be investigated with equal vigor. With some limited exceptions, most jurisdictions follow the general rule that the measure of damages for property claims is the cost to repair or replace the property, the property’s diminished fair market value, or some combination of the two measures.
When defending against a property damage claim, one must first assess whether the damages are consistent with the jurisdiction’s legal standards. For example, a plaintiff may attempt to claim replacement cost damages. If a plaintiff asserts a replacement cost claim, then they are attempting to obtain the value of a new piece of property in exchange for old, damaged property. This situation creates a windfall for the plaintiff as it typically does not accurately represent the value of the damaged property at the time of the loss.
Even if a plaintiff’s method of calculation is consistent with the law, the figures utilized in the calculation may be inflated. A plaintiff may do this in many ways, the most prevalent of which include:
- Assigning a high pre-loss market value to the damaged property.
- Utilizing a lower depreciation percentage.
- Claiming the property is unique or rare.
- Offering an inflated cost of repair.
It is no surprise that plaintiffs want to maximize their recoveries. Likewise, defendants have an equally strong motive to take advantage of the procedures available to reduce their damage exposures. This process often results in the plaintiff offering a higher damage figure, followed by the defendant offering a lower one. The jury then is left to decide which figure to award, if any, and may even chose a figure somewhere in between.
Given the above process and motives, it is critical that defendants assess damages early. This is true especially if the property is to be demolished or destroyed because of fire, water loss, or structural collapse, for instance. To make an early assessment, investigators should document and inspect the damaged property to determine if it can be repaired. An estimate of repair or replacement should be prepared if the property is repairable. If it is a total loss, the property should be appraised to determine what its value was just prior to the loss.
First-party claims professionals are charged with the arduous task of answering the phone at any time of day and driving to evaluate damage to a particular structure that was insured under their companies’ policies. These first-party claims professionals know the difference between types of mold spores, whether a pock on a roof was caused by hail, or whether a load-bearing column damaged by fire needs to be removed or repaired. Ultimately, they will be the ones determining whether losses involving a house fire, warehouse explosion, or pipe breach will be the cause of $100,000 in damages—or $1 million.
When an incident occurs, most insurance companies have a representative on scene within days, if not hours, to assess the damages and initiate measures necessary to remediate the loss. If the loss is going to be subrogated, that claims professional will be called upon to prove that those damages are viable. If the subrogating party has an experienced first-party claims professional on scene, why shouldn’t the parties placed on notice of potential subrogation exposure do so as well?
The subrogating insurer will put claims professionals on the stand who physically inspected the damaged property to testify about what, in their opinion, was required to rebuild or repair the property. Similarly, it would behoove the potential defendants to offer a competing property loss expert who also has seen the property. If the defendant does not have a property expert physically inspect the damages, then that expert may lose credibility with the jury and the subrogating insurer will have a distinct advantage in the damage argument.
Just as a large loss requires sophisticated experts to examine liability, the damages and scope of the loss should never go unappreciated. While a general property claims professional or appraiser may be fine for many cases, a damage expert with expertise in the specific property should be consulted if a unique or specialized property is at issue. A party placed on notice should know exactly what the measure of damages is in the jurisdiction and have an appropriate damage expert on scene to evaluate the damages at issue in case a claim or suit is filed against that party. The presence and consultation of a damage expert at the outset often is overlooked by potential defendants and should be carefully evaluated and, if warranted, utilized.