Actual cash value, when defined as replacement cost less depreciation, is determined on the basis of an estimate of necessary costs for repair or replacement, not on what is actually spent. The Ghoman court reasoned that the fact that the insured had not actually incurred some of those costs because he had made repairs himself was legally irrelevant. The insured “contracted for the actual cash value of his loss. His recovery is not tied to the repair or replacement of his property,” the court held. The court agreed with the Alabama Supreme Court in State Farm Cas. Co. v. Ponder, 469 So.2d 1262, 1266 (Ala. 1985), which found that the homeowners replacement cost provision entitled insureds to ACV, although they chose to rebuild the dwelling themselves at a cost less than ACV.

Some courts become confused on this point. In Weidman v. Erie Ins. Group, 745 N.E.2d 292 (Ind. App. 2001), the court overlooked the distinction between an actual cash value and a replacement cost recovery. The court required an insured who was considering making repairs himself to repair or replace before receiving the overhead and profit component of actual cash value.

Replacement Cost Recovery

When insureds elect to repair or replace themselves and to receive replacement cost recoveries, there is an issue as to how much of the overhead and profit the insured should recover, as there generally is a cap on replacement cost recovery at the amount “actually and necessarily spent” to repair or replace properties. The issue also arises regarding how to value the insured's labor in light of the cap at the amount “actually and necessarily spent.”

An adjuster might determine what a professional contractor in that field would charge for doing the same job, and use that figure as a cap on the insureds' recovery. For example, if a contractor were compensated at the rate of x dollars per hour and estimates that it would require 10 hours to complete the job, the maximum amount that the insureds would be allowed to recover would be 10x. This would be true even if the insureds took more than 10 hours, but if the insureds were able to complete the job in 6 hours total, they would be entitled to a recovery of 6x. The same analysis could be applied if the contractor bid on a per-job basis, rather than on an hourly one.

If an insured is not in the business of doing the type of repairs needed on the type of property in question, calculating the amount of overhead may require some creativity. Overhead for a professional contractor includes general expenses not chargeable to any particular job. For example, such overhead expenses may include rent, heat, light, power, general insurance premiums, travel, legal expenses, and general payroll. For a business or homeowner doing its own repairs, overhead might include increased costs, such as higher electric bills, higher water bills, and more transportation and phone expenses than normally would be incurred. If it is necessary for an insured to take time off from work to complete the repairs in a timely fashion, the insurer also may want to consider the insured's loss of wages.

One court has held that, when an auto dealership policy entitled the insurer to request that the insured make its own repairs and be paid “the actual cost,” the actual cost included overhead (Vern Eide Buick, Inc. v. United States Fid. & Guar. Co., 273 N.W.2d 116 [S.D. 1978]). The court reasoned that the term “actual cost” was ambiguous. If the insurer wanted to exclude overhead from the recovery, it could have done so explicitly. Because standard policies cap recovery at the amount actually spent, it may be reasoned, based on Vern Eide Buick, that overhead will be included in a replacement cost recovery of a do-it-yourselfer.

If an insured replaces the property himself, one could argue that he is not entitled to recover profit, unless he is a commercial insured in the business of doing the same type of repairs as are needed on his own property. If he is such a commercial insured, then repair of his own damaged property will use time that would otherwise be devoted to repairing the property of others. In that event, he may be entitled to recover profit. If he does not recover profit, he arguably will not be fully indemnified.

If the insured is not a commercial insured who repairs property of the type damaged for a living, then the insured may not be entitled to recover an element of profit. Replacement cost recovery is limited to the least of the policy limit on the property, the theoretical replacement cost for like quality on the same site, or the necessary amount actually spent. If recovery is limited by the third of these three limits, then a do-it-yourselfer arguably cannot recover profit on the job done because there was no element of profit that was actually spent. In Vern Eide Buick, where the insured was entitled to recover the “actual cost” of making its own repairs, the insured and insurer agreed that an element of profit was not included.

The insured may argue that a fair measure of his profit would be the amount of profit used in calculating the theoretical cost of replacement. However, the policy sets forth separate caps on recovery. One is a theoretical measure of replacement cost; another is the amount actually spent. It is mixing apples with oranges to take the profit from one and use it in calculating the other.

Why would an insured who completed repairs himself elect to receive an ACV recovery rather than a replacement cost recovery, even though the ACV recovery does not include betterment? In an ACV recovery, as discussed above, profit is included in the calculation, although depreciated. If the amount actually spent, which does not include profit, is less than the ACV, which does include a depreciated amount of profit, it benefits the insured to elect an ACV recovery.

This circumstance might present itself with respect to a new home. Suppose there is a $20,000 actual cash value loss, of which $2,000 represents profit. The home is new, so the $20,000 figure represents both RC and ACV because the home has not suffered any depreciation yet. To effect repairs, the insured actually spent $18,000. The insured benefits by taking an ACV recovery.

The actual cash value of a loss is the same for those who do repairs themselves and for those who hire contractors. In contrast with the actual cash value, which remains the same, the replacement cost may be less for one who repairs himself than it is for one who hires a contractor. It may be less because of the cap on a replacement cost recovery of the amount “actually and necessarily” spent, and in light of the fact that the insured who repairs himself arguably will not recover an element of profit unless he is in the business of making that type of repair. Also, he may receive less with respect to the elements of labor and overhead, due to that same cap on recovery.

This month's Coverage Analysis Column is prepared by the Property Loss Research Bureau as a service to Claims readers. It is designed to present information about case law and other authority applicable to the interpretation of insurance policy provisions. Every effort has been made to insure that the information provided is accurate. However, the opinions expressed here are for internal use only. They do not constitute a substitute for legal advice as to the law of a particular jurisdiction as applied in the full factual context of a particular claim.

The opinions expressed in this month's column are those of the staff of the Property Loss Research Bureau and do not necessarily represent the opinions of members or other insurers. The opinions of PLRB staff do not represent an indication or prediction of any future action or position of any member or other insurer. Readers should consult with management to determine their company's positions on the issues discussed in this column.

Sande Salstone is counsel and senior research analyst for the Property Loss Research Bureau in Downers Grove, Ill.