The Personal Property Appraisers Post

Posted by Todd W. Sigety, ISA CAPP

Last year for the Appraiser Workshops Blog I found a well written and informative article on litigating insurance claims. Although much was not applicable to the personal property appraiser, within the article was a very good interpretation of the Broad Evidence Rule. The Broad Evidence Rule (BER) in effect states that "every fact and circumstance which would logically tend to the formation of a correct estimate of the loss" may be considered by the courts. It is of course up to qualified appraisers to place a value or multiple values on property based upon the facts and multitude of circumstances.

The Broad Evidence Rule is defined on Forbes' site Investopedia as "A rule outlining the guidelines insurers must go about determining the value of lost, stolen or damaged property. The broad evidence rule does not specify any one method to value any one piece of property, only that the means which most accurately displays the true cash value of the property will be used."  Forbes clarifies the definition with "The broad evidence rule is used by insurance companies to determine the cash value to be paid out to the insured in the event of a claim. As opposed to using the traditional cash value (replacement cost minus depreciation), the broad evidence rule can take into account such factors as the age of the property, its tax value and any possible profits the item may have accrued".

David Maloney in his popular appraisal reference book Appraising Personal Property: Principles and Methodology (page 112) expands on the BER interpretation with  "The Broad Evidence Rule (a.k.a., The McAnarncy Rule) states that there are no fixed or rigid guidelines for the determination of the amount of recovery in case of loss. The two standards normally used (fair market value or replacement cost (new) less deprecation) are merely guides, and are not the sole determination of actual cash value. The rule allows for consideration of all the facts and circumstances (such as degree of obsolescence at time of loss, property has no market value-in-use, profitability, owner's opinion of value) which logically tend to develop a correct estimation of value of the destroyed or damaged property for the purpose of ascertaining the actual cash value at the time of loss or damage".

Because of the wide spread acceptance of the BER by the judicial system, much is left open to interpretations by the court. The BER has been viewed as both a positive and a negative in settling insurance claims. In any event, appraisers working on insurance claims should be aware of and familiar with the BER and how it is applied. The following excerpt on the BER is an excellent starting point. It is a good addition to what is typically found in personal property appraisal theory and methodology texts as it is written by attorneys.

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From an article By Jay Barry Harris, Esquire and Barbara E. Brigham, Esquire FINEMAN & BACH, P.C.

LITIGATING ACTUAL CASH VALUE ISSUES FROM AN INSURER'S PERSPECTIVE

Under the broad evidence rule, in a determination of actual cash value by the trier of fact, "every fact and circumstance which would logically tend to the formation of a correct estimate of the loss" is to be taken into consideration. The New York Court of Appeals in McAnarney held that the trier of fact could consider: original cost and cost of reproduction;

the opinions upon value given by qualified witnesses; the declarations against interest which may have been made by the assured; the gainful uses to which the buildings might have been put; as well as any other fact reasonably tending to throw light upon the subject.

The broad evidence rule has been praised as furthering public policy by indemnifying the insured through a more equitable distribution of insurance proceeds than results from other approaches. The reason for this is that an insured is able to present evidence showing the inadequacy of the market value or replacement cost less depreciation approaches due to special circumstances.

However, there are criticisms of the broad evidence rule as well. It is not a definite formula, as is the repair cost less depreciation approach, and lacks certainty or predictability. For example, when the insurance is acquired, no figure as to the value of the property is available. However, except under unusual circumstances, the insurer can closely estimate the "value" of the property through the replacement cost less depreciation formula to determine an insured's needs.

Another criticism of the broad evidence rule is that the consideration of an indefinite number of facts concerning the property leads to speculation, conjecture and a clouding of the issue of actual loss. This criticism has been met with the argument that any evidence which may potentially come into play under the broad evidence rule will be admitted only if relevant and if it is not too speculative. Such evidence is evaluated for admissibility just as any other evidence is evaluated prior to being admitted.

Further criticism of the rule is that insurers may take advantage of collateral issues to escape liability. For example, suppose an insured has paid for $100,000.00 worth of insurance. The argument presented is that the insurer should not be allowed to escape payment of the full amount by showing, for instance, that the insured could not sell the building located in a deteriorated neighborhood for more than $50,000.00. However, the full value of the policy is a limit on the insured's recovery, not the amount of recovery. In addition, indemnity is the purpose of insurance and insured's are to recover the value of the loss they incur, not on the loss to the property. Although:

[i]t may be true that insurers are ostensibly receiving a windfall if they are allowed to pay less than the full amount of the policy. . . . because a "moral hazard" is created by allowing the insured to recover in excess of his loss, allowing the insurer to pay less than the full amount seems to be the lesser of two evils.

Despite these criticisms, the trend is toward using the broad evidence rule. One court summarized the advantages of using the broad evidence rule as follows:

"To put the matter in other words, the courts, when faced with a choice between applying some standardized rigid rule such as replacement cost minus physical depreciation or of adopting some more flexible test which can be modified in such a way as to accord more nearly with the principle of indemnity, have generally preferred the latter alternative even though it has involved the sacrifice of administrative convenience and simplicity."