Section 2: Why Does Market Rate Determine Reasonable Cost

The concept of fair market value permeates such a wide spectrum of Texas and federal legal practice that it is rare not to use the term with some degree of regularity when advising, presenting, or contesting a valuation. 

In Texas case law, reasonable compensation is discussed as early as 1885 when the Texas Supreme Court explained that the legislative taking of land required compensation of “the fair, reasonable salable value of plaintiff’s property.”  Gulf, C & S.F. Ry v Fuller, 63 Tex. 467, 471-72 (1885).  Valuations to determine fair market value in condemnation proceedings continue today, but such proceedings comprise only one of the many areas where fair market value arises. Equally venerable in Texas case law is the use of market value to measure damages for failure to fulfill a contract. Damages incurred from the conversion of personal property, fraudulent inducement to sell or purchase property, wrongful sale of repossessed collateral, antitrust violations, insider’s profits, and casualty loss’ are all measured in terms of fair market value.

Materials and services also have a ‘fair market value.’ The market to be considered should generally be that which the party seeking the materials and services would ordinarily use.

Given Texas’ long history of applying fair market value as evidence of reasonable compensation, it should not surprise anyone of the court’s holding in Ghoman as to the proper calculation of a claim’s amount of loss:

“Any cost that an insured is reasonably likely to incur in repairing or replacing a covered loss.” —Ghoman v New Hampshire Ins. Co., 159 F. Supp. 2d (N.D. Tex. 2001)

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