Even if a tenant did sue, they will lose unless you were somehow negligent.

Tenant shall be obligated for the costs of such repairs, replacements, and related services if the need for such repairs, replacements, and related services results from the negligence or misuse by Tenant, other residents of the Property, or Tenant’s Landlords, servants, employees, invitees, or family members.

To be sure, we can complicate the argument by introducing the tax advantages that real estate investment such as depreciation etc…but we won’t go there now.so, if we assume that the appreciation of real estate in general is going to be negligible over the next several years, as a prudent investor you should look for properties that can cash flow at the minimum rate of return equivalent to or better than the rate the bank would give you on your money. 

For example: If I bought a house for $200K, and the quote to construct the very same house in the same location is $300K, then the value of improvements should be considerably high ($200K) and the value of the land be considered negligible (closer to 0).Of course this helps depreciate more improvements in the life of the property, but I would like to hear your thoughts on whether this logic would hold up with IRS in the event of an audit.What do you think?

Seems like most burst pipes are caused by ignorance/negligence rather than a willful flipping of a breaker by a tenant.

Or would it just even out and have negligible effect (i.e. more supply & equally more demand = nominal gains in appreciate or appreciation stasis).

Appraisals are based on comps so probably negligible value diff.  

That's almost 10% and I think it's not negligible. 

I am an out of state investor, so I relied on my ex-property manager to do their job, however they were gross negligent.

What are you doing so grossly negligent that your insurance company would not cover an insurance claim on ?