<i>In the Spotlight:</i> The Diminishing Value of Depreciation Defenses

Parties may agree upon the history of a claim and the provisions of the policy that will control, but a valuation dispute nonetheless may arise. Sometimes a dispute will occur because the policy language at issue may be susceptible to differing interpretations. A dispute may also arise because the insurer argues for an underwriting intent that does not appear evident in the language of its policy or because, in the insurer's view, the policyholder will enjoy a windfall if the policy language is enforced as written. Regardless of the reason, such disputes are fairly common. An examination of cases in a few jurisdictions will provide some insight into the issues these disputes present, and may provide some basis for predicting their outcomes. In addition, such an examination may offer insight into the benefits of avoiding such disputes.

If a policyholder does not repair or replace damaged property, or if a policyholder has not purchased a policy that would cover the full costs to repair or replace, insurers often will be required to pay only a reduced amount determined through application of some depreciation approach. While depreciation arguments may be valid and have proven successful for insurers in many cases, it is important to remember that depreciation is not a wild card. Depreciation is not always applicable to property losses and, even when applicable, it may not apply in the manner the insurer advocates.