Daniel Veroff | Property Insurance Coverage Law Blog | March 25, 2019
California has statutory and case law that defines replacement cost and actual cash value, and these laws are read into every insurance policy notwithstanding what the policy language says. This blog has several posts on the subject,1 and this post aims to give you one cohesive post to consult for all your questions on calculating ACV and RCV.
Actual Cash Value – Total Versus Partial Losses to the Structure
Insurance Code section 2051 proscribes how ACV is determined for partial and total losses to a structure. In some cases, the claim value changes significantly based on whether a loss is deemed total or partial. So, the preliminary question is, when is a loss total versus partial?
A California appellate court finally answered that question in 2014 after nearly a hundred years of uncertainty. In California Fair Plan v. Garnes,2 the court held that a loss to the structure is “total” if the structure has been totally destroyed; it is a partial loss if some usable portion is left.
Garnes therefore prohibits insurance companies from using the economic total loss formula frequently used in auto cases. Under that formula, some of the car remains, but the fair market value of the car before the loss is less than the cost to repair or replace minus depreciation. Under Garnes, this cannot be used in property claims.
Actual Cash Value – Total Losses to the Structure
When there is a total loss to a structure as defined in Garnes, Section 2051 requires the insurance company to make an immediate ACV payment of the fair market value of the property at the time of the loss, or the policy limits, whichever is less.
How do you determine fair market value? The law does not say. It is generally accepted in the industry that fair market value is determined by obtaining a fair market value appraisal from a certified California appraiser.
Actual Cash Value – Partial Losses to the Structure
For a partial loss to a structure, Section 2051 requires payment of the cost to repair, replace, or rebuild with materials of like kind and quality, minus a fair and reasonable deduction for physical deprecation. In other words, it is RCV minus physical depreciation. Therefore, the accepted practice is to determine the full cost to rebuild and make a deduction for physical depreciation.
Limits on Depreciation for Structural Losses
Under section 2051 and Regulation 2695.9(f)(1), depreciation must be based on the actual age and condition of the item at the time of the loss and reflect a measurable difference in the market value of the item. Regulation section 2695.9(f)(1) requires this to be set forth in writing and provided to the insured.
Under section 2051, structural components that do not normally get repaired or replaced—like interior wall studs—cannot be depreciated. Insurers must consider how that component is treated in all cases; not just in the property at issue in the claim.
Under both sections 2051 and 2695.9(f)(1), the insurance company can only take a deduction for physical depreciation. This means that items like material sales tax, labor, and overhead and profit cannot be depreciated.
Future changes to ACV laws?
We caution that there is a bill currently pending in California that may eliminate the distinction between total and partial loss payments for structural ACV claims. AB 188 would require ACV to be calculated based on the partial loss formula in either a total or partial loss. Tomorrow, Derek Chaiken of our California office will publish a separate blog post that addresses our thoughts on the proposed changes. In short, we have mixed feelings on it.
Actual Cash Value – Personal Property
Unlike structural property, there is no distinction in California law between total and partial losses. Therefore, RCV is RCV as set forth above, and ACV is RCV minus physical depreciation.
Replacement Cost Value – Structures and Personal Property
RCV is the same whether applied to a total or partial loss, and whether applied to personal or structural property. Under section 2051, the measure of indemnity for RCV is the necessary cost to repair, replace or rebuild with materials of like kind and quality.
Challenging the Insurer’s Structural RCV Estimate
Technically speaking, the law requires that the insured incur expenses above the amount of the ACV payment to receive any further RCV payments. However, in practicality insurers may be willing to make undisputed advanced payments as the replacement progresses as long as you can provide proof that the repairs are in progress and the payments are necessary to move forward.
In many cases, however, the carrier will simply issue a replacement cost estimate, deduct depreciation, and do nothing until amounts above the ACV are incurred. What if the RCV estimate from the carrier is not enough to actually replace?
Insurance Regulation 2695.9(d) states that the insurance company must provide the insured with a copy of any written estimate it bases a claim payment on. If the insured contends that the repairs will exceed the insurer’s estimate, the carrier must do one of the following three things:
- Pay the difference between its written estimate and a higher estimate obtained by the claimant; or,
- if requested by the claimant, promptly provide the claimant with the name of at least one individual or entity that will make the repairs for the amount of the written estimate. The insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and which will allow for repairs in a manner which meets accepted trade standards for good and workmanlike construction at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by these regulations; or,
- reasonably adjust any written estimates prepared by the repair individual or entity of the insured’s choice and provide a copy of the adjusted estimate to the claimant.
Replacing at a New Location
There is presently a lot of controversy around rebuilding at a new location or buying a property elsewhere. Insurance Code section 2051.5 states that an insured can choose to rebuild at another location or buying a new house, and the insurer must base its claim payment on the replacement cost at the loss location. In other words, you must determine the RCV to replace at the loss location, and that number becomes the maximum the insured can recover by replacing elsewhere.
Controversy arises as many carriers will not pay for the cost of new land. If an insured buys somewhere else, many insurers will determine the value of the land and deduct that amount from the purchase price. A similar result happens if new land is purchased and a new home is built on it. Under our view of the law, this is improper. The law does not allow for such a deduction. Carriers argue, however, that insurance does not cover land and the insured gets unjustly enriched because they end up with two pieces of land, since they get to keep the land at the original loss site. Be that as it may, insureds simply cannot replace at a new location without also buying the land, and the law does not authorize the insurer to make such a deduction. We expect to see this play out in future court battles.
Since this post aims to be a one-stop-shop for determining RCV and ACV in California in 2019, we appreciate any comments you have on issues we may not have addressed here. We will update the post as necessary in response.
1 See, e.g., Claims Handling Requirements by State – California; California Supreme Court Affirms California Fair Plan Ass’n v. Garnes, and Preserves Homeowners’ Interests; In California, Can an Insured Homeowner Recover Full Replacement Cost by Purchasing a Home at Another Location?; Does Actual Cash Value Mean Fair Market Value or Replacement Cost Minus Depreciation?
2 11 Cal.App.5th 1276 (Cal. App. 2017).