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Elberon Bathing Co. v. Ambassador Insurance Co.

Decided: June 8, 1978.


On certification to the Superior Court, Appellate Division.

For reversal and remandment -- Chief Justice Hughes, Justices Sullivan, Pashman, Clifford, Schreiber and Handler and Judge Conford. For affirmance -- None. The opinion of the court was delivered by Conford, P.J.A.D. (temporarily assigned).


The principal question on this appeal concerns the valuation methods to be used in ascertaining the "actual cash value" of a partial loss under the Standard Form Fire Insurance Policy, N.J.S.A. 17:36-5.15 et seq. We are also required to determine whether failure to apply the appropriate standard is sufficient cause to set aside an appraisal award. The appeal arises in the context of a judgment in the Law Division in favor of the insured plaintiffs in the amount of $52,000 for excess coverage based on a $77,000 appraisement minus $25,000 primary coverage (on another policy) for a loss due to fire. The Appellate Division affirmed in an unreported opinion.

Defendant, Ambassador Insurance Company, issued a fire insurance policy to plaintiffs, Elberon Bathing Co., Inc. and Elberon Bathing Club, to indemnify them against loss by fire to club facilities and contents situated in Long Branch. The $125,000 policy represented excess coverage over a

$25,000 primary policy issued plaintiffs by Great Southwest Fire Insurance Company.

On January 8, 1975, while the policy was in effect, plaintiffs' bathing club was damaged by fire to an amount "greatly in excess of $25,000." Great Southwest promptly paid Elberon the $25,000. However, plaintiffs and defendant were unable to adjust plaintiffs' covered loss under the excess policy. Pursuant to the terms of the policy and an "agreement for submission to appraisers," plaintiffs and defendant each appointed an appraiser. The appraisers were, in turn, to select a disinterested umpire. However, they were unable to reach agreement thereon. Plaintiffs then filed a complaint and an order to show cause requesting the court to appoint an umpire pursuant to the terms of the policy.*fn1 The court appointed an umpire.

Shortly thereafter the appraisers and umpire went to inspect the insured premises which had already been repaired. According to affidavits of the umpire and defendant's appraiser, the umpire and plaintiffs' appraiser believed that their role was merely to determine the replacement cost of the damaged property. The umpire and plaintiffs' appraiser determined the actual cash value of the entire property to be $180,000 and the amount of fire loss to the property to total $77,000. This consisted of $8,500 for damage to personal property and $68,500 for pure replacement cost of the realty destroyed. Defendant's appraiser refused to sign the award.

Plaintiffs sought entry of judgment on the appraisement. Defendant answered, denying the finality of the award on the basis of its contention that the umpire had not heard all the evidence nor considered all matters submitted to him. It further disclaimed liability because of Elberon's

alleged fraud in submitting a claim which it knew was substantially in excess of the actual cost to it to repair the damage. Defendant demanded that the award be vacated, and requested a jury trial on all the issues. In addition, defendant separately sought discovery of various "loss estimates" prepared by plaintiffs' appraiser and gave notice, pursuant to the policy, of defendant's desire to examine plaintiffs' documents and representatives.

The trial judge heard oral argument and reviewed the pleadings and affidavits. He stated that the appraisers could properly determine that replacement cost was the appropriate measure of the actual loss recoverable under the policy. He also found that there was no manifest mistake justifying setting aside the award. After deduction for the primary insurance coverage judgment was entered for plaintiff for $52,000. The Appellate Division, agreeing with the trial judge that under the appropriate narrow standard of review "the facts in the case do not dictate a basis for vacating the award * * *," affirmed. We granted certification. 74 N.J. 284 (1977).


Defendant argues that an award based on replacement cost without deduction for depreciation contravenes the measure of recovery provided for in the policy, that being "actual cash value." We agree.

N.J.S.A. 17:36-5.15 et seq. regulates the subject of fire insurance. As required by N.J.S.A. 17:36-5.19, the policy before us insured Elberon "* * * to the extent of the actual cash value of the property at the time of the loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality * * *." This appeal calls for a determination of the meaning of "actual cash value." That phrase is also found in the appraisal provision of the Standard Form Policy which conforms to the statute.

In case the insured and this Company shall fail to agree as to the actual cash value or the amount of loss, then, on the written demand of either, each shall select a competent and disinterested appraiser and notify the other of the appraiser selected within twenty days of such demand. The appraisers shall first select a competent and disinterested umpire; and failing for fifteen days to agree upon such umpire, then, on request of the insured or this Company, such umpire shall be selected by a judge of a court of record in the State in which the property covered is located. The appraisers shall then appraise the loss, stating separately actual cash value and loss to each item ; and failing to agree, shall submit their differences, only, to the umpire. An award in writing, so itemized, of any two when filed with this Company shall determine the amount of actual cash value and loss. * * * (emphasis added)

N.J.S.A. 17:36-5.20

The appraisal award here under review purported to follow the stated procedure.

A review of the record indicates that the appraisal was based on replacement cost without consideration of the element of depreciation. Plaintiffs argue that straight replacement cost is a permissible standard. We reject this contention. A standard of replacement without depreciation is inconsistent with the intent and the language of the statute which, as noted above, provides for insurance to the extent of the actual cash value of the property at the time of loss but not to exceed the amount it would cost to repair or replace the property with material of like kind and quality. Repair or replacement costs constitutes an upper limit on, not the absolute measure of, the insurer's liability. See Riegel & Miller, Fire Insurance from Insurance Principles and Practices, 360 (3d ed. 1947). To equate "actual cash value" with replacement cost alone would render the limiting phrase meaningless. If actual cash value is less than replacement cost in a particular case the former controls.

Rejection of pure replacement cost is further consonant with the legislative provision permitting insurers to provide for extended coverage to include replacement cost under an extended coverage endorsement. N.J.S.A. 17:36-5.22

provides that under such an endorsement the insurer may agree "to reimburse and indemnify the insured for the difference between the actual value of the insured property at the time any loss or damage occurs and the amount actually expended to repair, rebuild or replace with new materials of like size, kind and quality * * *." Such an endorsement specifically precludes deduction for depreciation. See Ruter v. Northwestern Fire and Marine Ins. Co., 72 N.J. Super. 467, 471-473 (App. Div.), certif. den. 37 N.J. 229 (1962). It seems clear that if a specific provision is required to reimburse for pure replacement cost then the basic policy should not be so construed.

Finally, allowing pure replacement cost would violate the principle of indemnity by providing a windfall to the insured:

To allow the insured to recover the original value of real estate that has depreciated, * * * would be for the insurance company to pay for losses that were not caused by fire. Such prodigality would simply furnish an incentive for the destruction of property, because more could be recovered as insurance than the undamaged property was worth. Even under present conditions it is found that business depressions, which reduce the values of buildings and stocks of ...

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