Betterment, ACV, and depreciation are important considerations in resolving a first party claim.  The question we often see on the subrogation side of claims is whether a party must accept an ACV settlement on the tort claim, and whether claimants can be forced to take reductions for betterment and depreciation.

What comes as a surprise to many, is that although most files do settle by considering betterment, ACV or depreciation on the asset, Courts are not bound by this.

In Alberta, one of the leading cases is Lamont Health Care Centre v Delnor Construction Ltd., 2003 ABQB 998, a 2003 decision involving a hospital fire.   The hospital was built in several stages with construction of the first wing completed in 1928 (wing 65), the second in 1948 (wing 28), and the third in 1965.  In 1995 roofers caused a fire while replacing the torch on roofing.  The two oldest wings were demolished, and the cost of replacing both wings as over $4.7 Million dollars.   Not surprisingly, the Defendants disputed the claim for replacement cost.   Evidence was tendered that both wings had outlived their “physical and functional value”.

However, the purpose of tort law is to put a claimant back into the position they would have been in prior to the loss.  Lamont’s position was that before the fire they had a hospital.   While the hospital was old, the older wings were maintained and “provided the services required”.   At the time of the fire, there was no government approval for a new hospital, and certainly no guarantee that a new facility would be built any time soon.   Prior grant applications had been rejected.   From the claimant’s perspective, replacement cost based on the original square footage including the cost of complying with new regulatory requirements set out in the Alberta Building Code, design fees, and unrecoverable GST was the appropriate measure of damages.

The Court noted that there is no automatic adjustment for betterment, and went on to explain that it is not up to a claimant who has lost something to finance the betterment by getting new for old:

[177]         As a general principle, an aggrieved party is entitled to be placed in the same position it would have been in had the tort not occurred. There is no requirement that damages be adjusted automatically to reflect betterment. It is simply a factor to be considered. For example, if a claimant is required to build a new home as a result of the defendant’s negligent destruction of their original home, the claimant should not be required to finance any “betterment” that is a necessary result of rebuilding: Nan v. Black Pine Manufacturing Ltd. (1991), 1991 CanLII 1144 (BC CA), 80 D.L.R. (4^th) 153 (B.C.C.A.); Evans and Another v. Balog and Another, [1976] 1 N.S.W.L.R. 36 (CA).

In rendering its decision, the Court noted prior case authority involving the replacement of a mill.  In that case the Court declined to deduct betterment where the layout of the mill was more convenient, because the new layout was required by planning authorities.

The Court ultimately endorsed the following 2 principles:

1. Damages should put a claimant in the same position as if the negligent act had not occurred; and
2. Damages should be reasonable.

The starting point is to consider replacement cost, and then to consider whether depreciation for betterment is reasonable.   Where this fails to put the claimant in the same position as before the loss, Courts will consider alternative methods of evaluating the loss.

For instance, in Lamont, the Court accepted that replacement value was not the proper valuation for damages, because the damaged wings had little to no value though they were still being operated as part of a functioning hospital.   The Court considered the following options:

(a) Potential market value;

(b) Replacement cost prorated over the remaining life of the hospital;

(c) Financing costs for replacement.

Ultimately the Court settled on the net financing costs for the replacement facility.

Another consideration in assessing whether there is a betterment is whether the claimant is truly getting something more by replacing new for old.   For example, a claimant may be getting a new building, but does that increase the value of their property?  Alternatively, was the original building expected to last the full life of a project?  This was a consideration in Penn West Petroleum Ltd. v. Kotch Oil, [2000] A.J. No. 378.  In that case the original structure was expected to last the full life of the project such that replacement of new for old did not provide any enhanced function or use.   The Court made the following observations:

112      The rebuilt facility performs the same function as the old facility. Some improvements were made, such as adding additional headers in the manifold building, and replacing the 500-barrel water tank with a 750-barrel water tank, but these betterment items were not included in the claim made by the Claimants against the Defendants. The rebuilt facility is essentially the same as the old facility. It performs the same function. It is not more profitable. It is not more economical to operate. It is not more automated. With the exception of some safety features which have been deducted, it utilizes the same technology. The only betterment which the Claimants have received is that they have replaced new for old. However, the evidence clearly indicated that the old Misty Lake Battery would have lasted for the life of the Misty Lake field, whether that life might be a further 20 years or 30 years or more. It was a sweet facility, corrosion was not a problem and the Battery was properly maintained. At the end of the life of the field, some pieces of equipment might be salvageable and might have some resale value, depending on the economics and technologies of the time, but there can be no real expectation today that that will be the case in 20 or 30 years.

As a result, the Court declined to reduce damages for betterment based on new for old.

Cases have also touched on the cost of obtaining a betterment, or otherwise putting out money prematurely to obtain a replaced facility.   In Penn West, the Court accepted that to the extent a court deducts the amount by which the property is improved, the claimant should be compensated for any early unanticipated outlay for the rebuild or replacement.

It is important to note that the onus of proof on betterment rests with the party alleging it (Vermilion & District Housing Foundation v. Binder Construction Limited, 2017 ABQB 365 at para. 195).  As a result, questions an adjuster should keep in mind when adjusting a loss include:

1. Is the new building or repaired building the same footprint or design as the old?
2. Are there modifications? If so, are those modifications a result of new regulatory requirements?  If they are, a Court may decline to reduce damages.
3. Is replacement of new for old truly giving the Claimant something they did not already have?
4. Does a depreciated offer put the claimant in the same position they were in pre-loss?

A simple example is a historical home where the home has exceeded it’s expected life.  There may be no value left in the home, but settlement based on ACV fails to give the claimant what they had pre-loss, which was a home.

Another tidbit to keep in mind is that, conceptually, labour costs should not be depreciated on the standard property loss claim.  For example, although the house in question may be 50 years’ old, the labour itself is not a ‘betterment’, but rather a necessary expense incurred as a direct result of the loss.

There may always be exceptional circumstances that arise, but in assessing a loss the overarching consideration for adjusters is whether valuing the loss based on ACV or reducing damages for betterment or depreciation put the claimant in the same position they were in pre-loss.  If the answer is no, then a Court is likely to assess damages on a different basis.

Ultimately, claimants cannot always be forced to accept reductions for betterment, depreciation, or ACV. The circumstances of the claim, as always, is paramount in determining what is appropriate.

Written by Tony Slemko K.C. and Amanda Kostek, partners from CBM Lawyer’s subrogation practice group with thanks to Kristen Hansen, associate, for her research.