Compensation: current value or replacement value?

Compensation for damage: current value or replacement value?

A road accident, a tree falling on the roof, flooding caused by a neighbour. Anyone who suffers property damage through the fault of a third party must negotiate compensation with the person responsible or, in most cases, with their insurer. It is precisely at this stage that matters become complicated.

The tortfeasor's insurer has a clear objective: to close the file at the lowest possible cost. The strategy is almost always the same: propose a repair of the item, or offer the so-called current value, that is, the residual value of the damaged property after accounting for depreciation. This amount is by definition lower than the replacement value, namely the price required to purchase an equivalent substitute.

In our practice at Haab Legal, it happens far too often that the injured party accepts a lower settlement without question. It is therefore well worth understanding when the current value is correct and when, instead, there is an entitlement to the replacement value.

The general principle: compensation at current value

Swiss tort law, governed by Art. 41 et seq. CO, provides that compensation must restore the financial position that existed before the damage occurred. As a rule, this means compensating at the current value of the property.

The logic is understandable. If the injured party were automatically awarded the purchase price of a new item, they would receive a windfall: a good with a longer useful life, possibly with more recent technology and better performance. Compensation is not intended to improve the injured party's position but to offset the actual loss.

There is also a practical reason. If the replacement value were always guaranteed, someone might be tempted to cause or aggravate damage in order to obtain a "new for old" replacement at another's expense.

How the current value is calculated

The calculation starts from the replacement value (normally the purchase price) and deducts depreciation, that is, the loss in value due to use and the passage of time. For various categories of goods, official tables indicate the average useful life, which facilitates the calculation.

Practical example: a tree from the neighbour's land falls and completely destroys the roof of a house. The cost of rebuilding the roof is CHF 100,000. According to the applicable tables, the useful life of that type of roof is 40 years. If the roof was 10 years old at the time of the damage, it had completed one quarter of its useful life. The current (residual) value is therefore three quarters of the replacement value: CHF 75,000.

The problem for the injured party is plain. They receive CHF 75,000 yet rebuilding the roof costs CHF 100,000. The difference of CHF 25,000 remains at their expense, despite bearing no responsibility for what occurred. A frustrating situation, but not necessarily a final one.

When the replacement value is owed

Compensation at current value is not an absolute rule. Swiss law recognises several situations in which the injured party is entitled to the full replacement value, in accordance with the principles laid down in Art. 42 CO on proof and determination of damage.

The damaged item would still have served for a long time

Where the incident forces the injured party to purchase a new item, yet the damaged one would still have served them for a considerable time as though it were new, compensation must cover the replacement value. The remaining useful life is determined by reference to the tables mentioned above. The legal doctrine (Honsell, Schweizerisches Haftpflichtrecht, § 8 N 48) is clear on this point.

The added value is not material

The fact that the injured party receives a new item does not automatically justify a deduction. A reduction is warranted only where the damaged item, owing to use and age, has a current value significantly lower than the replacement value (Brehm, Berner Kommentar, Art. 42 CO N 43).

The enrichment must be economically real

A deduction from the replacement value is permissible only if the alleged added value corresponds to an actual and realisable economic benefit for the injured party, for example in the form of concrete savings on other costs (Brehm, op. cit., Art. 42 CO N 44). A merely theoretical difference does not suffice.

Everyday items

For clothing, furniture and other consumable goods of daily use, Ticino case law has held that, as a rule, no deductions are made. The injured party cannot be compelled to make do with second-hand goods: compensation is to be calculated at replacement value (judgment of the II CCA of 28 January 2011, case no. 12.2010.108, consid. 8).

The position of the Federal Supreme Court

The Federal Supreme Court addressed the question squarely in its judgment 4C.87/2007 of 26 September 2007, establishing an important principle.

An enrichment of the injured party cannot be inferred simply from the fact that new materials or a new item are attributed to them in order to remedy the damage. The expenditure was, after all, imposed on them by the tortfeasor's unlawful conduct:

"cette dépense a été imposée au lésé par le comportement illicite de l'auteur."

The Federal Supreme Court further observed that systematically applying the "neu für alt" (new for old) principle would mean requiring the injured party always to bear part of the cost of restoring the previous situation. An unjust result:

"Le lésé subirait ainsi inévitablement un désavantage financier que rien ne justifie."

In other words, requiring the injured party to contribute to the cost of purchasing a new replacement item means imposing on them expenditure they would not have wished, and perhaps could not have afforded, had the damaging event not occurred.

A deduction is justified, according to the Federal Supreme Court, only where:

"il est établi que le propriétaire est clairement enrichi par des réparations réalisées au prix fort".

Only a clear and demonstrable enrichment of the owner can justify a reduction in compensation.

Do not accept compensation without verification

The distinction between current value and replacement value can be worth tens of thousands of francs. Insurers know this and almost always offer the current value, even when the injured party would be entitled to more. Accepting the first offer without a serious legal analysis means, in many cases, forgoing money that is rightfully yours.

Hugo Haab, Attorney-at-Law and Roberto Haab, Attorney-at-Law of Haab Legal, Law Firm and Notary in Lugano regularly assist private individuals and businesses in quantifying and recovering compensation. If you have suffered damage and the offer received appears insufficient, a professional assessment can make the difference.

For a personal consultation: info@haablegal.ch | +41 91 913 30 70