Insurable loss under “broad evidence” rules - by Sean Sargeant

May 12, 2017 - Appraisal & Consulting
Sean Sargeant,
Sargeant Appraisal Service

Here in rural Vermont after the maple sugar harvest the calendar rotates slowly from mud season to construction season, residential sales ramp up to their torrid summer pace, commercial refinancing blooms, the legislature thankfully adjourns for the year and school children look forward to June. I am pleased to report the passage of time has not changed a single one of these traditions.

Recently, I completed several real property appraisals for insurable loss under “broad evidence” rules. Rules of broad evidence came into existence in the courts in the 1970’s when calculations of actual cash value, commonly the insurer’s limit of liability, were multiples higher than well-supported market value indications. Over prior decades insurance policies most often referred to actual cash value as replacement cost new minus depreciation. While most appraisers would not immediately disagree with this concept, buoyed by nearly 30 years of sustained post-war growth and expansion, the actual cash value calculation showed depreciation as only physical deterioration. Clearly the practice neglected what appraisers immediately see as missing forms of depreciation; external (or economic) and functional obsolescence. Slowly 23 states, including Massachusetts, New Hampshire, Vermont and Rhode Island adopted rules of broad evidence for calculating actual cash value. 

The broad evidence rule states a wide range of information may be used in determining actual cash value and any evidence that may be regarded as a reflection of value be included. As I describe to my clients, under broad evidence my job is to provide the court with as many supported indications of value as possible, no matter how thin the support rests upon the actions of an operating market. It is the Court’s responsibility to weigh those indications they believe are most appropriate to the valuation of the loss and calculate actual cash value. The long list of value indications presented in an appraisal report prepared under the rule of broad evidence typically includes; assessed value, equalized assessed value, market rent, land rent, land value, replacement cost new, the three indications of market value using the traditional approaches (cost, income and sales), and the analyst’s reconciled opinion of market value placing the most weight on the actions of the market. These individual indications are supported with relevant data to the extent possible in the market and credible analysis that follows accepted appraisal practice. Appraisal reports under the rules of broad evidence are often twice as long as an appraisal report prepared for a lender and used to underwrite a mortgage loan. 

It is appropriate to assume all appraisal assignments prepared under the broad evidence rule will be going to litigation. Start by keeping a work file that will make a future discovery phase as easy as possible; all electronic files used in the analysis should be held in one location of your server and unmodified from the date of the report, keep a copy of any written data used in the analysis in your work file as well as a page of written notes about significant data that were excluded from the analysis and the reason for the exclusion. Use analytical methods tailored for litigation, such as converting overall capitalization rates into ‘net income multipliers’ that are more logical and simple to explain in a court room. If asked to develop an opinion of ‘Insurable Value’ you must read the specific policy language and define the subject property exactly as the policy does; typical exclusions in an insurance policy include replacement of foundations, utility connections and site improvements. 

While many appraisers avoid these assignments I find them extremely satisfying. In almost all cases the building improvements are destroyed at the time of inspection; forming a reconciled opinion of their physical attributes, quality and condition at the time of loss is an interesting four-dimensional puzzle. Constructing approaches to value that I would not typically use; such as a cost approach on a 120 year old light manufacturing facility; solidifies the theoretical concepts that underlie the method, such as depreciation from all three sources, deferred maintenance, and the difference between land value and site value. Preparing an assignment for litigation is itself a worthwhile exercise in the rules and standards that govern our profession. When next you are asked to perform an appraisal under the rule of broad evidence I would encourage you to investigate the assignment and consider the many interesting questions of value you have the opportunity to answer.

Sean Sargeant, MAI, SRA is a certified general real estate appraiser at Sargeant Appraisal Service, Rutland, VT.