Exploring the Doctrine of "Useful Life" and the Recovery of Damages?

The doctrine of “useful life” has applications in both accounting and litigation.  In accounting, “useful life” is forward looking to estimate the time an asset will produce value and remain in profitable service.  Accountants draw a comparison between the costs of operation versus the amount of income to determine whether to retain the asset.  In litigation, “useful life” is backward looking to estimate the time an asset has produced value and benefited a claimant. Lawyers seek to offset the value a claimant has derived from an asset against the damages sought by the claimant.

Absent the doctrine of “useful life” claimants seeking to recover the benefit of their bargain would be entitled to recover a brand new product to replace a product they had possibly used for multiple years.  Most commentators argue that a claimant who purchased a product with a “useful life" of 10 years, that fails after three years, should be limited to recovering for the remaining seven years of “useful life”.  They argue that a recovery for a the full price of a 10 year product, would create a windfall since the claimant would arguably receive a product with a “useful life” of 13 years.  In stark contrast, claimants argue they are entitled to receive the benefit of their original bargain, without regards to “useful life”, since they never received the bargained for benefit in the first instance.

Disputes involving the “useful life” and recovery of costs of repair or replacement frequently arise in the context of  construction defect cases.  Claimants often seek the full costs of repair or replacement even when such costs exceed the value of the existing asset.  Owners seek 100% recovery based upon the rationale they are entitled to defect free construction, and should be awarded whatever costs are required to provide them with such benefits. Contractors and designers argue the costs of repair or replacement must be pro-rated  to reflect the benefits of the prior "useful life" available to the owner, so as to avoid a windfall.

Application of the doctrine of “useful life” often depends upon the ultimate usage for which the construction is intended.  For example, owners seeking damages for defects in residential construction are often allowed 100% recovery subject only to offsets to reflect “economic waste”.  [See “What Every Owner and Contractor Should know About the ”Economic Waste Rule?", posted 2/15/23].  Whereas, owners seeking damages for defects in commercial  and industrial construction seeking 100% recovery must often overcome both the “economic waste rule” as well as the doctrine of "useful life".  The distinction between the differing applications appears to be based more upon equity favoring home owners than it does upon any legal rationale.

The courts also appear more likely to apply the doctrine of “useful life” to tangible assets having short, identifiable useful lives as opposed to tangible items having long, less determinative useful lives.  For example, tangible assets, including equipment and machinery involved in manufacturing, production, distribution, and treatment, often have a shorter “useful life”.  Likewise, some components of a building asset, have a limited “useful life”, including roofing materials, appliances, plumbing fixtures, and siding materials.  These types of assets often have a “useful life” between 10 and 20 years, before they fall victim to functional or economic obsolescence.  Such assets are deemed obsolete because the costs of repair greatly exceed the current depreciated value or the asset wears out and is no longer capable of fulfilling its intended purpose.  

In contrast, tangible assets having a long, indeterminate life span such as buildings and structures, are less susceptible to application of the “useful life” doctrine. Tangible assets such as buildings and structures, typically have “useful lives” of 50 years or more, especially if properly maintained, and generally appreciate in value as opposed to depreciate.  When buildings and structures are destroyed or suffer significant damage, courts are far less likely to reduce the costs of recovery based upon the remaining or expired “useful life”.   Unlike tangible assets having shorter “useful lives”, buildings and structures seldom suffer from functional or economic  obsolescence since they appreciate in value and seldom wear out if properly maintained. 

While the doctrine of “useful life” is most often asserted by by insurers defending against insurance claims, it has obvious application outside of the insurance context.  Yet, the doctrine is seldom applied by litigants in commercial litigation, most likely because it is either misunderstood or simply not known to most attorneys.