Why it matters

The U.S. Court of Appeals for the Sixth Circuit addressed the meaning of the policy term “obsolescence” in the context of determining the “actual cash value” of a fire loss. After surveying use of the term, the court determined that the insurer’s interpretation was inconsistent with common usage and that to extend the meaning as the insured suggested would render it ambiguous such that it would have to be strictly construed against the insurer.

Detailed Discussion

The insured, Whitehouse Condominium Group, owned an office condominium in Flint, Michigan, that was destroyed by a fire. The insurance company that covered the building admitted coverage. The dispute was over the extent of coverage owed.

The policy required the insurance company to pay the insured the “actual cash value,” which was defined as “replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.” The insurance company argued that the undefined term “obsolescence” should be read broadly so as to permit the insurer to reduce its payment to account for a decrease in the property’s market value.

The insured countered that the plain meaning of obsolescence in this context was limited to something inherent to the building itself, not an external factor such as the real estate market.

The Sixth Circuit, affirming the district court, ruled “that the commonly understood use of the term does not account for a decline in market value.” Further, the court stated that even if “the term obsolescence is ambiguous as to whether it includes economic obsolescence, we strictly construe it against Cincinnati.”

“In light of the contract language, 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 court concluded. “This result preserves the benefit of the bargain for both parties. As other courts have noted, ‘[i]t can hardly be said that an insured reaps a windfall by obtaining payment of actual cash value determined in a fair and reasonable manner when that is precisely what the insurer has agreed to pay under its policy in advance.’”

To read the decision in Whitehouse Condominium Group v. Cincinnati Insurance Co., click here.