Chip Merlin | Property Insurance Coverage Law Blog | November 22, 2016
In yesterday’s post, Determining Depreciation–Are Policyholders Getting Ripped Off, I promised to discuss issues of actual cash value and depreciation. The article I am critiquing giving rise to this discussion cited California law regarding actual cash value and then made this statement:
In states in which condition is not included in the definition of actual cash value, actual cash value is generally defined as replacement cost less depreciation.
Is this true?
Most property insurance adjusters have heard of the Broad Evidence Rule. IRMI provides a fairly straightforward definition of this approach:
A valuation rule that has evolved in some states and does not adhere to the principle that the traditional measure of actual cash value (ACV) (replacement cost less depreciation) is the sole measure of value at the time of loss. This rule provides for the examination of every standard of value having a bearing on the property under consideration, such as the age of the property, the profit likely to accrue on the property, and the property’s tax value. Ultimately, it calls for the selection of that “value,” which, in the event of a total loss, will provide complete indemnification and no more.
In Being In The Minority – The Broad Evidence Rule, the Tomoney Knox law firm stated the following:
Property insurance policies often value claims based on “actual cash value.” The term is defined differently in different states and in various policies. When confronted with an interpretation issue, courts typically calculate actual cash value (ACV) as: (1) fair market value; (2) replacement cost less depreciation; or, (3) under the “broad evidence rule.” The majority of states, including New York and New Jersey, follow the broad evidence rule. Pennsylvania, our home state, does not.
As the name suggests, the broad evidence rule is an inclusive valuation method. It allows any evidence/factor that tends to establish the correct estimated property value of a building or personal property. Some permissible valuation factors may include:
economic and functional obsolescence;
condition and physical deterioration;
sales and purchase offers.
Given the flexible nature of the broad evidence rule, this list isn’t exhaustive. However, the price of flexibility precludes a bright-line test for determining exactly how much weight should be assigned to each potential factor affecting valuation. For this reason, each ACV valuation under the broad evidence rule must be determined on a claim-by-claim basis.” (Emphasis added)
So, when determining actual cash value, the first rule for all adjusters is to determine what rule is to be applied. Analyze the policy language and state law. Nobody should assume Actual Cash Value equals Replacement Cost Value less Depreciation. In the majority of losses, it does not.