Insurance valuation explained

October 23, 2012 by  
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ACTUAL CASH VALUE VS. REPLACEMENT COST

If your policy provides replacement cost for your property policy for building and personal property, it can make a substantial difference in the ultimate settlement that you are awarded by your insurance company.  Most homeowner policies provide replacement cost coverage on the dwelling itself and attached structures, such as a garage.  Personal property coverage may be written at Actual Cash Value (ACV) or Replacement Cost (RC).  Some very high end expensive policies will provide for the full cost of repair or replacement without having to actually repair or replace, but most commercial and homeowner policies require repair or replacement to be complete before providing replacement cost benefits.  Some commercial polices and homeowner “floaters” will have different valuation provisions such as original cost or a value that is agreed up front.

Under most replacement cost policies, insurance companies will hold back money that is agreed in advance until you can prove you have spent your claim money for the full replacement cost of your loss including the policy deductible.  The amount paid up front is called “Actual Cash Value”, which should be what something is worth prior to the loss considering depreciation, obsolescence, condition, etc.  The difference between RC and ACV is often called a “holdback”.  The claim for this holdback is made after receiving the ACV settlement and on buildings it is usually done after the building is substantially complete.  Personal or business contents replacement cost benefits are usually claimed in batches as items are replaced.
 
But what does the actual cash value of your loss mean and how can you or your public adjuster deal with a company adjuster who may be overly aggressive applying depreciation or holdback to your claim payment? First, look for the definition of “Actual Cash Value” in your insurance policy. Our experience has been that most property policies do not define the term “Actual Cash Value,”  “Depreciation” or “Holdback.” If it’s not defined, then case law (prior decided court cases) have held that all factors influencing the value of something must be considered, such as replacement cost, fair market value, depreciation, condition, etc., however, the courts have held that not all of the factors must be weighed equally.
 
Insurance companies will often teach a simple mathematical formula to determine depreciation based on some in-house life expectancy tables that are at best subjective.  Applying a ratio to the age of an item over its purported life expectancy will equal a percentage to be applied against the replacement cost of an item. Many would argue the fairness of this method depends on whose life expectancy tables are being used. This method certainly does not take into consideration usage or the care one owner may take versus another.  One particular example comes to mind of  a retired couple who had a living room with snow white carpeting and furniture that was covered in plastic.  Although it was over 30 years old it still remained in pristine condition due to the fact that no one was ever allowed to set foot in that room.  One would expect a household with many family members and pets to likely have more wear and tear on personal property and structure than a retired couple or a single person having the same home and contents purchased within a similar time period. This same concept applies to building losses. A well maintained building with scheduled maintenance and repairs performed as required should not be subjected to the same standards as a home that has several years of deferred maintenance and failing systems.
 
Every dollar that is reduced in depreciation/holdback is a dollar in your pocket, especially if you do not plan to replace every item you lose.  If all your clothes are burned, they probably include many items that you dont wear or don’t need.  If you have duplicate or triplicate items, you are likely to replace only one of them.  Now that you know the rules you should know that the fair amount of depreciation to be taken can be subjective and subject to negotiations.  A good public adjuster is ready to fight to get you the maximum settlement possible with the least amount of holdback applied.