Insurance Coverage Q&A: Managing multiple ACV payments
How does the timing of multiple ACV payments affect the payment of withheld depreciation?
PropertyCasualty360.com editor’s note: Every claim is different, and some insurance policies can be difficult to interpret for unique situations. FC&S Expert Coverage Interpretation, the recognized authority on insurance coverage interpretation and analysis for the P&C industry, makes it simple to find credible answers to your complicated coverage questions. The following letter was edited for length and clarity.
Question: The insured has a homeowner’s policy with some unique language.
In regard to recovery of withheld depreciation, the policy requires the insured complete replacement within one year of the Actual Cash Value (“ACV”) payment. Actual Cash Value is a defined term in the policy. It is defined, in pertinent part, as the, “amount it would cost to repair or replace covered property, at the time of the loss or damage, with materials of like kind and quality, subject to deduction for depreciation . . ..”
The carrier calculated the “one year” time limit from the date the carrier issued its first advance, calling it an ACV payment. However, after continued negotiations with the insurance company, it made a substantial additional payment (not replacement cost) over 7 months later. There was a final ACV payment issued 5 months after that, for a total of 11 months after the first payment.
It is the carrier’s position that the first payment constituted its ACV payment and started the one-year clock ticking. By definition, the first payment could only have been a merit payment and not an ACV payment. Since the definition of ACV includes a determination of the cost to repair or replace the property, and at the time the first payment was issued, an accurate determination of the cost to replace and, by extension, the ACV, had not yet been identified. That did not happen for an additional 11 months. It would seem the purpose of the one-year limit is to give the insured one year to complete repairs, from the time that there is not only an agreed cost of repair. But the ACV payment for the agreed cost of repair has been issued. Prior to having an agreed cost of repairs, it is unreasonable to expect an insured to start repairs since they have no agreement on the amount they will be reimbursed. Yet, in this case, the carrier started the clock based on the date it issued its incorrect ACV (i.e. merit) payment, which was of no use to the insured as the amount was incorrect, as acknowledged by the carrier through its additional payments that were issued on an ACV basis.
It is our position that, based on a clear reading of the policy, the one-year time period cannot start to be calculated until after a final, agreed, ACV payment.
It should also be noted, as this answer will likely be shared with the carrier, that the policy offers a 180-day extension, at the expiration of the one year, which was granted. However, the 180 days was added to the incorrect one-year period. Based on the carrier’s calculation the insured will lose all of the withheld depreciation for failing to complete repairs in the carrier’s improperly calculated time frame. If the carrier calculates the time to complete repairs starting with when the ACV payment (as defined by the policy) was issued, the insured would be able to recover all of the withheld depreciation. Also, the insured only needs an additional 2-3 months to complete repairs from the expiration of the carrier’s incorrect deadline, further adding to the unreasonableness of the carrier’s position.
Please provide your thoughts on which date should be used as the ACV payment date for the purpose of calculating the time to make a replacement claim.
— Michigan subscriber
Answer: The policy states, “When our cost to repair… is greater than $5,000 and until actual repair or replacement is completed, we will pay only the ‘actual cash value’.”
Then, it requires notification of completion of the work within 30 days to obtain the holdback. It says. “You must complete the actual repair….within one year after the date we tender payment of ‘actual cash value.’”
When terms aren’t defined in a policy, courts turn to a standard desk reference. Merriam-Webster online defines tender as: An unconditional offer of money or service in satisfaction of a debt or obligation made to save a penalty or forfeiture for nonpayment or nonperformance; something that may be offered in payment.
The phrase “one year after the date we tender payment of ‘actual cash value’” directly implies that the payment of ACV would be completed.
In your situation, the carrier made three payments for ACV; the date the ACV payments would be considered tendered on the date of the last payment, not the first.
The carrier had not fulfilled its obligation until the last ACV payment was made. The year marker should start at the date of the last payment, not the first. Had the carrier wanted to start tolling the year from the first ACV payment, it should have written the policy that way. Otherwise, it’s ambiguous language, and the insured always gets the benefit of the doubt when a policy is ambiguous.
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