The Subrogation Strategist

In Westfield Insurance Group v. Silco Fire & Security, 2019 Ohio App. LEXIS 2810, the Court of Appeals of Ohio, Fifth Appellate District addressed whether the trial court properly instructed the jury that the applicable measure of damages for damage done to a computer network was the network’s replacement cost value rather than its fair market value. Based on the unique circumstances of the case, the Court of Appeals held that the trial court did not abuse its discretion when it instructed the jury on the replacement cost measure of damages rather than fair market value.

As stated in the case, FirstMerit Corporation (FirstMerit) had a data storage and disaster recovery center in Canton, Ohio. FirstMerit purchased a dry agent fire suppression system from Ansul Corporation and hired Silco Fire & Security (Silco) to install the system. The installation was completed in 2009. Thereafter, Silco provided routine service, inspection and testing of the system pursuant to an oral agreement with FirstMerit.

In 2015, the sprinkler system discharged while a Silco technician was conducting an inspection of the system. The discharge caused an intense sound and vibration that caused damage to FirstMerit’s computer network, hard drives and phone system. Silco representatives restored the system, but could not determine the cause of the activation.

FirstMerit declared the computer system irreparable, and built a new data center in Flint, Michigan. FirstMerit also filed a claim with its property insurance carrier, Westfield Insurance (Westfield). Three days after the sprinkler discharge, Westfield sent a subrogation notice letter to Silco, who filed a claim with its liability carrier, West Bend Mutual Insurance (West Bend).

In October 2016, Westfield filed a subrogation lawsuit against Silco. At trial, Westfield presented evidence of the replacement cost value of the computer equipment in the amount of $800,000. Silco also presented evidence of the replacement cost value of the equipment but valued the loss at a value of $294,658.82. However, Silco also argued that Westfield was only entitled to the diminution of fair market value of the equipment, which was even less.

The trial court instructed the jury that the measure of damages was the replacement cost value of the computer equipment. Silco objected to the instruction, arguing that the correct measure of damages for damage to personal property is the property’s fair market value, which is the difference in the value of the property immediately before and after the incident.

At trial, the jury found Silco liable for the loss and awarded Westfield $295,000. Silco filed an appeal with the Court of Appeals, arguing that under Ohio law, the measure of damages for personal property that is totally destroyed is the fair market value of the personal property.

After noting that Westfield proceeded to trial on its claim of breach of contract, the Court of Appeals discussed the proper measure of damages. As stated by the court, the measure of damages in a breach of contract action is the amount necessary to place the non-breaching party in the position he or she would have been in had the breaching party fully performed under the contract. The court further stated that when market value cannot feasibly be obtained, courts apply a more elastic standard, known as “the standard of value to the owner.” This standard considers several factors, including the value of the property to the owner, the property’s original cost, its replacement cost, its salvage value and the property’s fair market value at the time of the loss. Considering the unique and sensitive nature of the computer network, the court found that the trial court did not abuse its discretion when it gave the jury an instruction that allowed it to award replacement cost damages.

The Silco case demonstrates that although fair market value is generally the appropriate measure of damages for destroyed personal property, in instances where the market value of damaged property cannot be ascertained, the court may apply a replacement cost measure of damages instead. Thus, if the market value of an insured’s alleged damages cannot be feasibly ascertained, subrogation professionals handling Ohio cases should consider asking for replacement cost damages. In such circumstances, the replacement cost will be less difficult to prove, and, as in this case, may lead to a greater recovery.