Leonard Missionary Baptist Church v. Sears, Roebuck and Company, 42 S.W.3d 833 (2001)
Background. A church purchased a space heater from a local Sears store. A church member took the space heater to the church library in the basement of the church, turned it on, and left the room. The space heater started a fire that soon engulfed the church, resulting in a total loss. Because the city would not permit the church to build at the same location, the church bought a lot two blocks away for $20,000, cleared the lot for $200,000, and erected a new church building at a cost of $1.8 million. The church sued Sears, claiming that its defective product caused the fire. A jury returned a verdict in favor of the church in the amount of $2,347,670, representing the cost the church incurred in replacing its structure plus interest.
Sears appealed the verdict, arguing that the church’s damages should have been limited to the reduction in the market value of the property caused by the fire. Sears produced a real estate expert who valued the church property at the time of the fire at $200,000, and it therefore insisted that this was the true measure of the church’s loss, and not the cost of replacing the church.
The appeals court’s ruling. A state appeals court noted that “whenever there is injury to land, damages should include the difference between the value of the land before the harm and the value after the harm, or at [the owner’s] election in an appropriate case, the cost of restoration that has been or may be reasonably incurred. Where expenditures to restore or to replace to predamage condition are used as the measure of damages, a test of reasonableness is imposed. Not only must the cost of replacement or reconstruction be reasonable, but the replacement or reconstruction itself must be reasonably necessary in light of the damage inflicted by the defendant.”
The court noted, however, that there are certain kinds of “special purpose property,” including churches, that do not have “an active market from which the diminution in market value may be determined… . Permitting the injured party to recover replacement costs as damages in some cases is the only way to put that party in as good a position pecuniarily as if its property had not been taken or destroyed.” The court then turned its attention to the facts of this case, and concluded that the jury had correctly computed damages on the basis of the cost of replacing the destroyed church:
Here, there was evidence that the church was a special purpose property and that there was not an active market from which the fair market value of the church could be determined. The testimony was that the church was old, dating from the turn of the century, but was in good condition. Members of the congregation testified that the church was “special.” The pastor testified that the church was a “majestic” and “awesome” structure and that it was a “community church.” [The church’s] expert, the architect who designed [the] new church, testified that he viewed the church as “historic” and a landmark in the community; and that in his opinion there was no fair market value for a building of the church’s nature. Although Sears’ expert witness testified regarding sales of other churches to establish the fair market value of the church, the evidence elicited was that only four religious structures had been sold in the vicinity of the church within the past four years. But, one of the sales relied upon by the expert involved the sale of a synagogue that was not actually in close proximity to the church and there also was some question as to whether the other three churches were comparable to the church in question. Under these circumstances, the proper measure of damages was not determined by reference to the fair market value of the church before and after the fire. The appropriate measure of damages, one that would put the church in the same position it was in before the fire, was cost of replacement.
Relevance to church treasurers. The court in this case addressed the question of how to value the loss to church property caused by a defective product. In cases of total loss, the court concluded that replacement cost is the proper measure if a “reduction in market value” cannot be determined. In cases of “special purpose property,” such as a church, a computation of the reduction in market value may be impossible because of the difficulty of determining the property’s market value before or after a loss. Note that the church sought damages against Sears rather than its own insurer. When a church suffers a total loss of its property and seeks payment from its insurer, the measure of recovery will be determined by the insurance contract. Check your policy to see if you have coverage for replacement cost or reduction in market value—both for the structure itself, and for contents. As this case illustrates, replacement cost coverage often will be preferable.
This article first appeared in Church Treasurer Alert, July 2002.