The FC&S discussion of actual cash value indicates that depreciation should be taken from the replacement cost rather than from the original cost. Will you comment on this proposed adjustment?

Illinois Subscriber

Original cost should not figure in an actual cash value settlement. The insured buys protection for the real loss he suffers today. Suppose your insured had been given the typewriter. Would anyone suggest that he had no loss? Or, suppose the insured had really been “taken” and had paid $700 for this typewriter. What do you think the adjuster would say then about settling on the basis of original cost?

 The usual method of arriving at actual cash value is replacement cost minus depreciation. Depreciation represents a fair amount by which the recovery should be reduced because of the difference in age or in quality between the piece of property that was lost and its replacement. If a used typewriter is replaced with a used typewriter of the same make, age, and quality, the insured is in exactly the same position as he was before the loss. He has experienced no betterment and there is no justification for “depreciation” of any sort. Depreciation would come in if a comparable used machine were not available and it was necessary to replace the lost one with a new typewriter. Then the insured should expect to pay for the “betterment” he gets (depreciation, if you will) by receiving a new machine. In this case, the stolen typewriter was used by the insured for twenty-one months, so $50 depreciation from the cost of a new one seems reasonable.

 A homeowners policyholder lost an antenna in a windstorm. It was three years old and had a life expectancy of an additional five to seven years. Though the bill for replacement is broken down as to cost of material and cost of labor, the adjustor proposes to apply 30 percent depreciation to the bill as a whole. We believe that depreciation should be charged against the cost of materials only.

This adjuster insists that it is common practice to apply depreciation to labor costs, but we feel that this is unfair to the policyholder. Labor does not depreciate, it appreciates. Is it really common practice to depreciate labor? What is your opinion on the fairness of this practice?

Indiana Subscriber

The practice is common—and fair. Without the intervention of the windstorm, the insured would have had another five to seven years use of the antenna. At the end of that time he would have had to replace it, paying for both the new antenna and the labor involved in erecting it. Now the insured has a new antenna and can look forward to eight to ten years of using it. The insured has gained three years before expenses (representing both materials and labor) for a new one will be incurred.

 To clear the air with one of our companies on the matter of depreciation on property losses, we presented the claims department with a hypothetical case: Would depreciation be taken on a new $12,000 automobile if it were totally destroyed as it was being driven from the dealer’s showroom? The company replied: “Something that is bought and put to use is no longer new. It is perfectly proper to take depreciation.”

It is our opinion that such a position violates the principle of indemnification.

New York Subscriber

Whether or not the principle of indemnification is violated depends on how much depreciation the insurer would charge in such a situation. If, as one might think, your correspondent has in mind the drop in market value that usually accompanies the driving of a new car away from the showroom, then we agree with you. The fact that the owner of a new car expects to take a loss if forced to turn right around and sell the vehicle as a “used car” does not affect its actual cash value to him as the owner and user of the car.

 In the situation you described, the insurance company may be entitled to take some depreciation from the standpoint of use — though surely so minimal as to make it of questionable value to do so.

 A retail clothing store we insure recently had a burglary loss. All are in agreement that the value of the stolen socks is about $4,500 (net, after considering mark-downs, mark-ups, obsolescence, etc.), but the insured is insisting on an additional $1,122 for “handling, marking, stocking, freight, and other costs.” Is he entitled to this additional recovery?

Minnesota Subscriber

Adjusters commonly allow for freight charges in determining the actual cash value of mercantile stock. A merchant has not been indemnified if the lost stock is replaced at a point of purchase that is far from the store.

 The expenses involved in marking, handling, and stocking the merchandise are also included in an actual cash value settlement. Merchandise that has been arranged on the shelf has a greater value than merchandise that is not yet ready for sale, so the loss settlement should reflect that value.