At a recent break-out session at the ACE Conference in New Orleans, participants were asked to raise their hands if they could give a meaning for actual cash value.

 The common response was “Actual cash value is replacement cost minus depreciation.” But is it? And, if it is, what is to be depreciated? Cost of material? Labor? Overhead and profit?

 Or, is ACV the same as market value? What is the broad evidence rule, and does that apply? Many policies do not define “actual cash value,” so the courts often are left with the decision.

 One at a time, then. The cost of new material’s being depreciated appears to be widely accepted and is not subject to dispute. But when it comes to labor, it is a different matter.

 Two similar cases reached the Oklahoma Supreme Court and were answered within a day of each other in 2002. Both cases involved damage to roofs and an ACV settlement, and both addressed depreciation of labor.

 In the first, Redcorn v. State Farm, the court said that a “roof is the product of both materials and labor,” and so depreciation of labor costs were allowable. But in a dissenting opinion, three justices argued that labor costs should not be depreciated. A roof, they stated, was not a single product consisting of “labor-and-shingles,” but was a combination of products (shingles and nails) and a service (labor to install). Labor cannot lose value over time.

 One dissenting justice also pointed out that prior to the loss the insured had an installed sixteen-year old roof, and to be indemnified meant he was entitled to the value of the sixteen year old shingles plus the cost of installing them.

 The second case before the same court (Branch v. Farmers Ins.) also dealt with depreciation of labor. In this instance the court was asked to determine if labor costs for tear-off of a damaged roof could be depreciated, or whether these costs properly should be covered as “debris removal”? In answer to the first question, the court said that labor to install the new roof was a cost the insured was reasonably likely to incur, and so it was rightly included within the meaning of “replacement cost.” It followed, then, that labor could be depreciated along with materials.

 But having said that, the court noted that homeowners policies contained a separate coverage for debris removal following a covered loss. If a roof were damaged to the extent it had to be replaced, then, said the court, the damaged portion was rubble, or debris. And, if the whole roof had to be torn off to repair or replace the damaged portion, then those torn off pieces must also be considered rubble. Therefore, although the cost of the labor to replace the roof could be depreciated, the cost to remove the debris of the old roof could not.

 “Should contractors’ overhead and profit be depreciated?” is a frequently asked question. The Pennsylvania superior court addressed this in Gilderman v. State Farm Insurance Company in 1994. Here, the issue was whether the insurer could automatically deduct 20 percent contractors’ overhead and profit in addition to depreciation to reach actual cash value.

 The insureds argued that contractor overhead and profit should be included in figuring replacement cost; the insurer argued they should not since a contractor was not always used. The insurer held that the insured would reap a windfall profit if overhead and profit were to be included in calculating replacement. The court noted, though, that insureds under a replacement cost policy had paid an additional premium for the coverage and lost the benefit of that coverage if they did not elect to repair or replace.

 So, they could not be held to have gained. Overhead and profit was a component of replacement cost, and could be depreciated, but an additional amount should not be withheld.

 The supreme appellate court of New York addressed the same issue in Mazzocki v. State Farm Fire & Casualty. In a 2003 verdict, the court held that the insurer was obligated to include profit and overhead in replacement cost, and, therefore, in actual cash value whenever it was reasonably likely the services of a contractor would be needed. The court looked to Gilderman and to a Michigan case decided by the appellate court, Salesin v. State Farm Fire & Casualty.

 Many states adhere to the broad evidence rule in reaching actual cash value. Under this rule, as the court explained in the New York case of Mazzocki, “every fact and circumstance which would logically tend to the formation of a correct estimate of the loss” can be considered. The Supreme Court of Nebraska held in 2005 that if a policy contained no definition of actual cash value, then market value—the amount that a willing buyer might pay a willing seller—could be used, as well as any other fact that established value. (See Olson v. Le Mars Mutual Insurance Co. of Iowa.)

 Many states, seeing the confusion that has resulted, have required that a definition be added to policies. Nebraska, doubtless as a result of Olson, now states in its homeowners special provisions, that “In our determination of the actual cash value of Covered Property at the time of loss, an adjustment will be made for factors such as depreciation, deterioration and/or obsolescence.”

 The state of Washington has a comprehensive definition that encompasses whether a loss is repairable or whether the property has sustained a total loss.

 Maine, in an attempt to clarify, might possibly have opened another can of worms in its definition: “‘Actual cash value’ means the replacement cost of covered property at the time of loss, less the value of physical depreciation as to the damaged property.’Physical depreciation’ means a value as determined according to standard business practices.”

 Standard? According to which business? Enron? And so it continues….