Other policy provisions

Fair market value

Replacement cost less depreciation

Labor, sales tax, and contractor's overhead—how are these treated?

The broad evidence rule

Personal property

Valued policy laws

The states define actual cash value

In all forms of property insurance, the term "actual cash value" is usually the standard for determining the amount of insurance needed, the amount of loss to be paid, and the amount upon which any coinsurance or similar requirement will be based. The term itself is used in nearly all property insurance policies.

In general, the principle that actual cash value means replacement cost of the property at the time of loss less depreciation, long accepted in insurance circles, has often been replaced through case law and state legislation by the broad evidence rule. In its simplest terms, this rule means that the determination of the actual cash value of any property should include all relevant evidence an expert would use to set the value of the property, including replacement cost less depreciation and fair market value (which takes into account location, obsolescence, present value of expected income from the property, and economic conditions at the time of the loss). The rule applies equally to real property and personal property, commercial property and personal lines property, fixed equipment, mobile equipment, and automobiles.

 Three Primary Tests

Over time, courts have developed three primary tests to measure the actual cash value of property. They are as follows:

1. Fair market value, usually described as the price a willing buyer would pay to buy property from a willing seller in a free market.
2. Replacement cost less depreciation, generally accepted to mean the cost to replace property at the time of the loss minus its physical depreciation.
3. The broad evidence rule, a judicious application of either one or two to the unique circumstance of the claim, whichever is more favorable to the insured.

Which test will be used in a particular loss can depend on the jurisdiction under which the loss is to be adjusted. Different states subscribe to different rules, having developed variations of the three tests by case law and legislation. State laws span the spectrum from actual cash value meaning fair market value in California (see Jefferson Insurance Co. v. Superior Court, 475 P.2d 880, (Ca. 1970), referred to later) to the state of Pennsylvania where the law gives it the meaning of replacement cost (Judge v. Celina Mut. Ins. Co., 449 A.2d 658 (Pa. Super. 1982)). Each of these tests will be discussed after looking at the development of the policy provisions that refer to actual cash value.

 Policy Provisions

The insuring clause of the 1943 New York standard fire policy, which forms the basis for many of today's property coverage forms, states that the insured is protected "to the extent of the actual cash value of the property at the time of the loss but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after such loss." While the standard fire policy per se is no longer a part of Insurance Services Office policies, all of the ISO property forms use wording similar to the standard fire policy in their loss payment clauses.

The Building and Personal Property Coverage Form, CP 00 10 10 12, states that the value of lost or damaged covered property will be determined at actual cash value as of the time of the loss or damage. The insurer retains the option to repair, rebuild, or replace the property with other property of like kind and quality.

The ISO Homeowners HO 00 03 05 11 also promises to settle personal property losses "at actual cash value at the time of the loss but not more than the amount required to repair or replace." Buildings are covered at replacement cost if the 80 percent coinsurance clause is satisfied and actual repair or replacement is completed.

The Businessowners form, BP 00 03 07 13, on the other hand, promises to value covered property at replacement cost provided the 80 percent coinsurance requirement is fulfilled. But if it is not, then the insurer has other options, one of which is to value buildings at actual cash value. Like the other forms, the BP 00 03 connects the time of valuation to the time of the loss.

It is important to emphasize that these forms refer to actual cash value at the time of the loss. This may be quite different from the value at the time the insured acquired the property—and, in a period of rapidly rising or falling values, not the same as the value at the time the insurance was written. The point is particularly important to note when insurance is written for a term of more than one year and is reason enough to guard against automatic renewals in the same amount of liability.

The 1886 and 1918 New York standard fire policies stated specifically that the actual cash value of the property should be "ascertained with proper deductions for depreciation." This expression was dropped from the 1943 form, the last in the line, as being apparently unnecessary in view of previous court decisions, although some courts since then have determined that "actual cash value" means replacement cost without depreciation (Farber v. Perkioman Mut. Assur. Co., 88 A.2d 776 (Pa. 1952)).

The statement that the liability of the insurance company shall not exceed the cost of repair or replacement of the property with material of like kind and quality within a reasonable time after the loss makes the following clear: 

1. In the occasional case where one circumstance or another would make property sell for more than its physical replacement cost (as might occur if the building were on a particularly desirable piece of land), cost of repair or replacement is still the most that will be paid. 
2. Sentimental, historical, and similar factors do not increase the value of the property for insurance purposes, or the amount of recovery. However, some of these factors are reflected in the values established for fine arts floaters and similar valued contracts. Even in these cases, although the market value of the property may be enhanced by these factors, sentimental value to the insured is never a consideration.
3. The insuring clause of the standard fire policy also states that no consideration shall be given to increase of loss to real property because of the operation of a building law or ordinance governing repair, rebuilding, or demolition. However, if the policy either includes, or is endorsed to cover increased costs of construction resulting from those laws or ordinances, the increased costs would be included in the calculation of "actual cash value." For a discussion of this clause and insurance against this risk, see Commercial Property Endorsements Discussed.

Other Policy Provisions

Property insurance policies give the insurance company two options in case of loss (in addition, of course, to paying the loss in cash). It may repair or replace the property itself; or it may, in case of a partial loss, take the property at its agreed or appraised value, paying the insured the full value.

The first option is seldom exercised. It is sometimes resorted to where moral hazard is suspected and occasionally where it is mutually convenient to the insured and the insurer. However, should the insurer repair or replace itself, it could be held liable if the repairs were not carried out satisfactorily. The second option is used principally in losses involving substantial quantities of merchantable personal property, where the services of a salvage organization can reduce the ultimate loss.

It is important to remember that these methods of loss settlement are, under the terms of the policy, at the sole option of the insurance company—the insured cannot force the choice. In practice, however, the majority of losses are settled in cash.

Property contracts also provide for appraisal in case the insured and the insurer cannot agree as to the actual cash value of the property or the amount of the loss. This provision is occasionally invoked but only in a minority of cases. The provision refers only to value and amount of loss—the appraisers and the umpire have no authority to pass on such matters as compliance with policy conditions or coverage. 

Fair Market Value

Although many cases emphasize that market value of property is an important factor in determining actual cash value, it is usually impossible to use this as the sole standard in determining the actual cash value of a building because the value of the land is naturally an important factor in the market value of a building. In approving market value as important evidence of actual cash value, the courts have emphasized that this does not mean the price that an owner in distress might be forced to accept or that a purchaser in dire need of the property would be forced to pay, but rather "the amount which in all probability would be arrived at by fair negotiations between an owner willing to sell and a purchaser desiring to buy." This expression, which has been widely quoted, was used in Butler v. Aetna Ins. Co. of Hartford, 256 N.W. 214 (N.D. 1934).

An extreme example of the inability of market value to control actual cash value is found in Bailey v. Gulf Ins Co., 406 F.2d 47 (10th Cir. 1969). The insured had purchased a building with the knowledge that the city council had ordered it demolished. After a fire, the insurer refused payment and a lower court agreed that the demolition order had rendered the building valueless. But the appellate court reversed the lower court, holding that the measure of the insurer's liability is the actual cash value of the structure, not its relative value to the insured.

Certain types of personal property, however, for which a strong market has been established, are easily and equitably subject to market value as the test for actual cash value. Examples are farm products and livestock, liquor, fungible goods in general, and manufacturing machinery for which a used equipment market exists.

Market value is not as far from the broad evidence test as might first be thought. If a real estate appraiser were asked what factors went into the establishment of the appraised value of a building, the list would be similar to the broad evidence test. For example, the concept of depreciation is implicit in market value. That is, the market will take into consideration the physical condition of the property when setting its price. Then too, the location of the property, the uses for which it is suited, zoning, property taxes, general and real estate economic conditions, rent growth rate, and the like all affect market value. Some states have determined that actual cash value means fair market value. For example, in Ghoman v. New Hampshire Ins. Co., 159 F. Supp. 2d 928 (N.D. Tex. 2001), the court said that "under Texas law, the term 'actual cash value' in a commercial property insurance policy is synonymous with 'fair market value'," and added that "under Texas law, 'fair market value' for purposes of determining actual cash value under a commercial property insurance policy, is the price a willing purchaser who is under no obligation to buy would pay to a willing owner who is under no obligation to sell." 

The seminal case establishing the fair market value test in California is Jefferson Ins. Co. v. Superior Court, 475 P.2d 880 (Cal. 1970). The California Supreme Court was concerned with the effects of obsolescence in Jefferson. A building with a market value of $65,000 was deemed by appraisers to have an actual cash value of $170,000 when measured by replacement cost less depreciation. The insured, with $45,000 insurance and a 70 percent average (coinsurance) clause, stood to be a substantial coinsurer on a $25,000 loss if the appraisers' $170,000 figure was accepted. The lower court was upheld in its ruling against the insurer. The court noted that the insuring agreement was to indemnify up to "the extent of actual cash value…but not to exceed the cost of repair or replacement." If actual cash value is synonymous with replacement cost less depreciation, this paraphrasing of the insuring agreement would result "to pay replacement cost less depreciation but not exceeding the cost of…replacement." Replacement cost less depreciation can never exceed the cost of replacement. Therefore, the court ruled that actual cash value must be subject to a different interpretation. This court chose to find the term synonymous with fair market value.

Nebraska also uses fair market value as a determiner of actual cash value when the policy does not have a definition of the term. In Olson v. Le Mars Mut. Ins. Co. of Iowa, 696 N.W.2d 453 (Neb. 2005), the court said that "where a policy does not include a specific definition, there is a priority of rules to determine actual cash value as follows: (1) where market value is easily determined, actual cash value is market value, (2) if there is no market value, replacement or reproduction cost may be used, and (3) failing the other two tests, any evidence tending to formulate a correct estimate of value may be used."

Olson, the insured, owned a grain storage building insured for $160,000 with a $500 deductible. The building was damaged by hail, and the replacement cost of the damage was determined to be $95,040. The insurer estimated repair at $94,576, deducted depreciation and the deductible, and offered $57,365.60. Olson sued and noted in his affidavit that he had been offered $200,000 for the building shortly before the damage occurred. Further, a certified appraiser stated the building had a fair market value of $200,000. The insurer pointed to its standard practice of defining actual cash value as "cost to repair or replace less depreciation." The court noted that in earlier cases to come before it, it had been urged to adopt the broad evidence rule, in which every fact for forming a correct estimate of a building's value could be considered. The court went on to say that it "had no particular quarrel with that definition," but stated that "actual cash value must still be measured as an economic unit, i.e., related to what, in terms of value, one could receive for his or her property. Fair market value is a term which has been used and is generally understood by experts and lay people alike, and which may be found by employing, if you will, the broad evidence rule…We continue to approve that definition for 'actual cash value' wherever it is used in a policy of property damage insurance." The court found that there was no evidence that repairing the building would cause it to exceed its actual cash value of $200,000, and thus awarded the repair cost of $95,040 less the deductible, for a judgment of $94,540. 

Replacement Cost less Depreciation

Replacement cost less depreciation is the definition of actual cash value most likely to be heard in insurance circles. Depreciation, as used, "is not the type that is charged off the books of a business establishment, but rather it is the actual deterioration of a structure by reason of age, and physical wear and tear, computed at the time of the loss." (See Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017 (Okla. 2002), discussed later in this article, and also the Maine amendatory endorsement, discussed later in this article.) One reason for its popularity is that, in many cases, it is easy to calculate. All that needs to be done is calculate the cost of replacing (or repairing) the damaged property and subtract a fair amount of depreciation from that figure. Replacement cost less depreciation also embodies a sense of fairness; the concept of indemnity on which an insurance contract is based—that the insured should be no better or worse off after a loss than before the loss. However, problems do arise with the replacement cost less depreciation test.

The test is often a sound one, but when old buildings in old neighborhoods are involved, the test can lead to an over-valuation of the loss, a total loss sometimes equaling several times the market value of a building. This, in turn, can provide motivation for arson.

Most losses are partial, however, and those involving old buildings cause more difficulty than damage to relatively new buildings. The term "betterment" is often used by adjusters instead of "depreciation" as an adjustment to replacement cost, and it seems to describe the situation much more clearly. (Not everyone agrees. The court in Salesin v. State Farm Fire & Cas. Co., 581 N.W.2d 781 (Mich. App. 1998) noted that "depreciation was 'inexplicably called 'betterment'." Salesin is discussed later.) Most insureds understand that the purpose of insurance is to put them as nearly as possible in the same position as they were before the loss. If the repairs or restoration make the building more valuable than it was before the damage, most people are willing enough to pay for this "betterment." But even if "betterment" is used, it does not necessarily apply to items in a building that do not deteriorate.

In many small losses, restoration involves no enhancement of the value, even of an old building; in which case the cost of repair should be covered without deduction for depreciation or betterment even though new materials were used in the repair. On the other hand, certain parts of a building or its equipment—a roof is a good example—often have a foreseeable and generally accepted physical life and are expected to be replaced at certain intervals. Such losses should not involve serious argument. If a roof, for example, is destroyed after it has served half the time it might reasonably be expected to last, it is obviously equitable that the actual cash value measurement of recovery should be half the cost of replacing it with a roof of the same material. Between these extremes, there are countless cases that involve a reasonable difference of opinion as to whether the value of the building has been enhanced by the repairs. For example, a painted surface or a hardwood floor might become marred, but sheet rock or support beams would not normally need to be repaired or replaced during the life of the building. Installing these items to repair damage could then not be called "betterment." The more factors taken into consideration in establishing replacement cost less betterment, the more the sense of the broad evidence rule is approached.

In Pennsylvania, the measure of damage to property depends upon whether the property is repairable as opposed to when a building is completely destroyed. If the damages are repairable, the measure of damage is the cost of the repairs; however, if the building is completely destroyed and cannot be repaired, the fair market value is the amount of the decrease in its value, and not its replacement cost, as determined in Babich v. Pittsburgh & New England Trucking Co., 563 A.2d 168 (Pa. Super. 1989) and affirmed in Arch Ins. Co. v Carol & Dave's Roadhouse Inc., 2013 U.S. Dist. LEXIS 64809 (W.D.Pa. 2013). Arch filed a subrogation action against Carol & Dave's seeking recovery of the amount of insurance benefits Arch paid to its insured, Fairfield Township Volunteer Fire Company No. 1 (Fairfield), after fire destroyed a building on Fairfield's premises. In litigation, Arch disclosed damages totaling $693,508.67 (building ACV at $563,158.28); but later filed a pretrial statement listing the replacement cost of the building of $1,309,268.03 as it's measure of damages. Arch argued that the case fell within the exception recognized in Commonwealth Dep't of Transp. v. Estate of Crea, 483 A.2d 996, 1001 (Pa. Commw. Ct. 1997). In Crea, the plaintiff was allowed to use replacement cost for a collapsed bridge because there was no "value in the market place" for a public bridge that is a component part of a highway system). However, the District Court concluded that under Babich and other Pennsylvania authorities, the property measure of damages is the decrease in fair market value of the property.  The finding of the District Court was affirmed by the 3rd Circuit Court of Appeals concluding that Pennsylvania law is clear that the "measure of damages for injury to property is the cost of repairs where that injury is repairable; however, where the injury is characterized as permanent [as when a building is completely destroyed], the measure of damages becomes the decrease in the fair market value of the property. Repair and replacement costs are irrelevant when the damage is permanent, only the reduction in market value can be considered."Id. The exception to this rule recognized in Crea and Pennsylvania Department of General Services v. United States Mineral Products Co., 587 Pa. 236, 898 A.2d 590, 599 (Pa. 2006) is inapplicable when there is no value in the market place for the destroyed property. 

Labor, Sales Tax, and Contractor's Overhead—How Are These Treated?

In calculating replacement less depreciation, or, indeed, actual cash value, the question often arises as to what is to be included. Labor? Sales tax? Contractor's overhead and profit?

The Oklahoma Supreme Court addressed two cases involving depreciation of labor in determining actual cash value and held that it was proper to do so. In Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017 (Okla. 2002), the insured's roof was damaged by windstorm or hail. The payment for actual cash value, which was measured by replacement less depreciation of materials and labor, was disputed by the insured. But the court said that "a roof does not have a separate market value from the building it covers… A building is the product of both materials and labor." A dissenting opinion by three justices argued that labor costs should not be depreciated because a roof, as in this case, 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, they argued, could not lose value over time. One justice also pointed out that prior to the loss the insured had an installed sixteen year-old roof, and following the loss indemnification meant he was entitled to the value of the sixteen year-old shingles plus the cost of installing them. However, as noted, this was a minority view.

The second case addressed by the Oklahoma Supreme Court, Branch v. Farmers Ins. Co., Inc., 55 P.3d 1023 (Okla. 2002) reached a similar conclusion in a claim involving loss to a roof. Here, the court said that labor costs for a new roof were replacement costs, and therefore could be depreciated. However, in this particular case, the court said that the layer of roofing that had to be torn off to lay the new roof was "debris" within the meaning of the policy provision for reasonable expense to be paid for debris removal, and therefore this cost was not subject to depreciation. Oklahoma, follows the broad evidence rule (discussed later) in determining actual cash value.

Should sales tax be depreciated? Or, should sales tax even be included in reaching an actual cash value figure? In Lukes v. American Family Mut. Ins. Co., 455 F.Supp.2d 1010 (D. Ariz. 2006), the court was asked to rule on whether the insured was entitled to the inclusion of sales tax in the actual cash value of his contents, which had been destroyed by fire. The insurer held that the insured was not entitled to sales tax until the personal property was actually replaced. The court found no applicable Arizona cases, and so considered other findings. One was Ghoman (noted earlier), which found in its definition of actual cash value (fair market value) that sales tax clearly fit within the definition. In Ghoman, the court said that "replacement costs include any cost that an insured is reasonably likely to incur in repairing or replacing a covered loss, such as profit and sales tax, and these amounts should be included in the actual cash value award to [the] insured." The Lukes court said that, in all probability, the Arizona Supreme Court would concur with Ghoman if it had to rule on this question. The court looked at the policy language governing loss settlement, which promised to pay actual cash value, but no more than "the amount which it would cost to repair or replace covered property with material of like kind or quality." The court said it was important to note that the language was "would cost," not "did cost", stating, "A reasonable interpretation of the Policy is that it covers any cost that an insured is reasonably likely to incur when repairing or replacing covered property."

There have been several cases addressing the issue of contractor's overhead and profit. In Ghoman, the court not only held that sales tax was a part of replacement cost but so was profit. There are two well-known cases addressing the issue of contractor's overhead and profit. The first of these is Gilderman v. State Farm Ins. Co., 649 A.2d 941 (Pa. Super. 1994). Here, the insureds sustained a covered loss and were given an actual cash value settlement—replacement less depreciation—but an additional 20 percent representing contractor's overhead and profit was deducted from that amount.

The insureds disputed this deduction, which was a standard practice of the insurer. The court said that the "fundamental inquiry underlying this litigation is precisely where the cost for a general contractor's overhead and profit fit into the loss payment equation, i.e. replacement cost less depreciation = actual cash value." The Gildermans argued that contractor overhead and profit should always be included in repair or replacement cost estimates; the insurer argued that overhead and profit should never be included since the use of a contractor was not always necessary to repair or replace damaged property. The court looked at the policy, which promised to pay actual cash value whether or not repairs or replacement actually took place. The court agreed that in some cases a general contractor would not be necessary. But, on the other hand, there were many instances where a general contractor would be needed; the insurer could not then make repair or replacement estimates and then deduct the 20 percent when the contractor's expenses could reasonably be anticipated. The insurer pointed out that including the amount could result in a windfall for the insured if a contractor was not hired, but the court answered that the insureds had paid an additional premium for replacement coverage and so this could not be seen as a windfall. It should be noted with regard to this case that the court was disputing the practice of automatically deducting 20 percent. Indeed, the court stated that "repair or replacement costs include any cost that an insured is reasonably likely to incur in repairing or replacing a covered loss. In some instances, this will include use of a general contractor and his twenty percent overhead and profit." The Gilderman decision was refined somewhat in Mee v. Safeco Insurance Company of America, 908 A.2d 344 (Pa. Super. 2006) when the court said the insured "is entitled to overhead and profit where use of a general contractor would be reasonably likely, even if no contractor is used or no repairs are made." This determination, of course was based upon the insured's replacement cost policy.

The second case involving withholding of contractor's overhead and profit is Salesin v. State Farm Fire & Cas. Co., 581 N.W.2d 781 (Mich. App. 1998). We should note before further discussion that both Gilderman and Salesin objected to the automatic deduction of an additional 20 percent. There is comment in Salesin that State Farm was then the only insurer routinely taking the deduction. 

In Salesin, the insured sustained a covered water damage claim and was paid an actual cash value amount based upon repair cost of $27,908.98, from which was deducted $1,048.44 (depreciation, called betterment in the adjuster's letter) and $5,581.79 for contractor's overhead and profit. The court looked at other cases, and found them not as relevant as Gilderman. The court said that "the term 'actual cash value' allows the deduction of depreciation but not of contractor's overhead and profit." The court also agreed with Gilderman in that contractor's overhead and profit should "always and automatically be included within the payment of actual cash value of the damage made to an insured before actual repair or replacement under a replacement cost policy like the one in this case." The court "uncomfortably" found that the insured was entitled to the withheld amount of $5,581.79 even though it cost the insured less than the amount he received to make the repairs. This was because the policy did not contain any reference to "the necessary amount actually spent to repair or replace the damaged building," as in the ISO HO 00 03.

The debate continued to rage in Mazzocki v. State Farm Fire & Cas. Corp., 1 A.D.3d 9 (N.Y.S.2d 2003). Here, the plaintiff sustained covered storm damage and filed a claim for actual cash value. The payment did not include profit and overhead. The insureds sued, citing Salesin in an attempt to estop State Farm from withholding the payment. But the court noted that there was a difference from Salesin. In Salesin, the insurer included general contractor profit and overhead in its estimate of replacement cost, and then deducted the amount from actual cash value. But in Mazzocki, the replacement cost estimate did not include contractor's profit and overhead and thus impacted the actual cash value amount received. The issue was whether replacement cost should include profit and overhead even if not actually incurred. The insurer argued that profit and overhead was a contingent expense (contingent upon the property's actually being repaired or replaced) and therefore should not be included. But the court said that "a replacement cost estimate is equally hypothetical or contingent as to all materials, labor and contractor services." The insurer's replacement cost estimate of the damages had included profit and overhead "if incurred." This meant, said the court, that the insurer had contemplated the possible need for a general contractor. Therefore, the matter was remitted to the Supreme Court for further proceedings to determine whether the loss had been reasonably likely to require a general contractor. If so, actual cash value should have included the amount. 

The Broad Evidence Rule

The broad evidence rule is often used to determine actual cash value when the policy in question does not define actual cash value. Replacement less depreciation, cost of reproduction, obsolescence, and fair market value may all be considered in the equation.

The fact that obsolescence, deteriorated neighborhood, inability to use the property, and similar factors should be taken into consideration in determining insurable value has been emphasized in the courts under what has become known as the broad evidence rule. McAnarney v. Newark Fire Ins. Co., 159 N.E. 902 (N.Y. 1928) is the leading case on this question. It involved the fire destruction of an old brewery that could not be used because of the National Prohibition Act. The building apparently had no other economic use, and the owner had advertised it for sale, unsuccessfully, for a fraction of the amount of insurance carried. In striking a compromise position between the insured and the insurer, the court said, "Where insured buildings have been destroyed, the trier of fact may, and should, call to its aid in order to effectuate complete indemnity, every fact and circumstance which would logically tend to the formation of a correct estimate of the loss. It may consider original cost and cost of reproduction; the opinions upon value given by qualified witnesses; declarations against interest which may have been made by the insured; the gainful uses to which the buildings may have been put; as well as any other reasonable factor tending to throw light on the subject." In so reasoning, the court decided on a value between replacement cost less depreciation and the market value of the building. 

There is also the common problem of valuing a building destroyed by an insured peril when that building is being or about to be demolished. Two cases based on similar fact situations were considered by the United States district court for the northern district of Illinois. 

In the first case, Aetna State Bank v. Maryland Cas. Co., 345 F. Supp. 903 (N.D. Ill. 1972), suit was brought by the mortgagee, Aetna. The insured purchased a complex of buildings on which he had a mortgage and then entered into an agreement to have the complex demolished. The buildings were destroyed by fire after demolition had begun. Although the court was asked to consider several questions concerning the liability of the insurers that had written the coverage on the buildings, the main question was to determine the actual cash value and, hence, the amount of liability of the insurers. 

The court held that even though there was coverage under the policies, the insurers were not required to pay for the loss because the buildings had no value. The court said, "The finding, in legal terms, of liability on the part of the defendant insurance companies does not ipso facto mean that there is a value that can be collected on policies in practical terms." 

Commenting further on the application of replacement cost less depreciation test to actual cash value the court said, "It would be interesting to apply a principle which includes a replacement value to a case where the insured was himself already in the process of paying a wrecker to do what the fire did for him for nothing. To allow almost a quarter of a million dollars to be paid for buildings that were valueless and whose duration of existence was governed solely by the rapidity of the swing of the wrecker's ball which was operating at the behest of the insured and with the acquiescence of the mortgagee would indeed produce a grossly inequitable result." 

The companion case, arising out of a similar fact situation, is Garcy Corp. v. Home Ins. Co., 353 F.Supp. 329 (N.D. Ill. 1973). The owner in this case brought suit on the same set of circumstances as did the mortgagee in Aetna State Bank but with the additional claim that he should recover for the largest building of the complex, a seven story building, on which demolition had not begun. 

The District Court ruled that since wrecking had begun under a contract that called for demolition of all the buildings, none had any value, and the insured, therefore, could show no loss. The decision, however, was appealed by the insured and reversed by Garcy Corp. v. Home Ins. Co., 496 F.2d 479 (7th Cir. 1974). (See also Baily and Arch, both discussed earlier.) 

Several facts that had not been considered by the lower court seem to have had a significant bearing on the ultimate decision by the court of appeals. They are as follows: it was in use as a warehouse for inventory and equipment; it had not been stripped of salvageable material or prepared for demolition; the insured hoped to sell the building weeks before the wrecking crew would reach it and could have halted demolition if it had been sold. It was also shown that the building was listed with real estate brokers, and an appraisal made at the request of a prospective buyer placed a value on the building of $633,532. These factors, particularly the last, were influential in deciding the final outcome. 

The court reasoned that since the insured was using the intact seven story building as a warehouse and was trying to sell it, it had economic utility; in short, the building was not in process of demolition. Since the insurer did not contest the value established by the appraiser, and because the appraisal value exceeded the total coverage, the insured was able to recover the latter amount. 

One further case, Board of Education of Hancock County v. Hartford Fire Ins. Co., 19 S.E.2d 448 (W. Va. 1942), involved a school building that had been replaced by a new building, was not being used, and was scheduled to be demolished. Here again there was a total loss, and the state supreme court held that the factors of obsolescence justified a recovery of a smaller amount than replacement cost less depreciation. 

None of these cases—and this is also true of cases in other states approving this principle—lays down a rigid rule for measuring the effect of obsolescence. This is, essentially, a practical matter. The important point of these cases is the principle (quoting from the opinion in McAnarney) that "every fact and circumstance which would logically tend to the formation of a correct estimate of the loss," including the economic value of the property, should be considered in determining the actual cash value.

The Supreme Court of Wisconsin noted that the broad evidence rule "gives considerable leeway and latitude to trier of facts to determine actual cash value of insured property," and thus "gives to the trial forum the right to consider in a given case all facts reasonably tending to throw light upon the subject." In Doelger and Kirsten, Inc. v. National Union Fire Ins. Co., 167 N.W.2d 198 (Wisc. 1969), the insured had a fire loss in which wooden patterns used for making alligator shears were destroyed. At the time of the loss, the patterns were over thirty years old and had not been used for some time prior to the loss. The insured held that the proper measure of the loss was replacement cost; an expert testified that the reproduction cost was $12,200. The insurer countered that present market value was the correct measure and because the patterns were obsolete they were of no value at all. The trial court utilized replacement cost minus physical depreciation and minus obsolescence in determining a value of $4,840. The insurer appealed the decision. In its review, the court looked with approval at McAnarney, discussed earlier, and noted that "under the 'broad evidence rule,' we need not find the route traveled by the trier of fact in this case to be the only route that could have been traveled. We need only to find it a proper and acceptable one. This we do."

Clearly, where there is an obvious case of obsolescence and limited or no economic usefulness to the insured property, the only safe procedure is to discuss the matter with the underwriters and try to come to an agreement—when the insurance is written, instead of after a loss—as to some reasonable measure of value. 

Although these cases appear to link the broad evidence rule only with instances of obsolescence or inability to use the property, that is not the norm. The case of Redcorn, discussed earlier, used the broad evidence rule in determining the actual cash value of the insured's roof. All relevant factors—purchase price, replacement cost, appreciation or depreciation, the age of the building, the condition in which it has been maintained, and market value—are to be considered, said the court. Many states other than Oklahoma (the Redcorn case) apply the broad evidence rule. In Olson, discussed earlier, the court held that the broad evidence rule was the third rule to be used, following market value or replacement cost, if there was no definition of actual cash value in the policy in question. And, in Travelers Indemnity Co. v. Armstrong, 442 N.E.2d 349 (Ind. 1982), the Supreme Court of Indiana cited four methods of determining actual cash value, but gave the broad evidence rule as the majority rule. 

Personal Property 

The same principles apply to personal property of all kinds, but in one sense these losses are less difficult because the value of personal property is not tied to the value of land. With property that has been used for some time and that is expected eventually to be worn out and replaced—clothing, household furniture, and business furniture and equipment, for example—the standard of replacement cost less depreciation is usually sound. The problem with this kind of property—particularly with household contents—is its great diversity, combined with widely different rates of depreciation and dates of acquisition. A house holder builds up his personal property over a period of years and seldom keeps records. Except for recent purchases or items purchased on an installment plan, he is usually able to give no more than an approximation of when the property was purchased and what it cost when new. Market value is an unreliable guide, as few insureds, for example, would agree to settle the loss of a fine piece of furniture on the basis of the cost of a similar piece at the second hand store. The Texas Supreme Court made this point in Crisp v. Security National Ins. Co., 369 S.W.2d 326 (Tex. 1963) when it said "since there is no market value for certain property, such as household goods and clothing, their actual cash value would have to be determined without reference to market value." Obviously, each claim situation will have its own peculiarities, not always in line with guidelines an insurance company or an adjuster may seek to apply. 

That was, essentially, the reasoning of a Louisiana court in Hullender v. Phoenix Assur. Co., 250 So. 2d 534 (La. Ct. App. 1971). Two insureds were each entitled to recovery under a fire policy, and they each gave an accounting in lower court of the property that was destroyed, the approximate date of purchase (wedding presents made up a portion of the loss of one of the individuals), and cost price. The lower court awarded the insureds an amount equaling approximately 76 percent of the cost price figures, and the insurance company appealed, saying, "Common knowledge would indicate that a depreciation of such small proportions is quite inaccurate." After reviewing the case, however, the court of appeal upheld the ruling of the lower court, finding neither the truthfulness of the claimants nor the reasonableness of the award open to question. The insurer's protestation that a larger percentage of depreciation was more common was to no avail. 

Just as with buildings, the replacement cost of personal property may be more or less than the purchase price. In a rising market, where replacement cost has risen faster than depreciation, the insured might justly recover more than the original cost; whereas in a falling market, recovery is apt to be much less. 

Stocks of merchandise, raw materials, etc., often do not suffer any depreciation. In such a case, the proper measure of recovery is the cost of replacing them at the current market value, less any salvage; merchandise that has become shopworn and deteriorated in value should, of course, be subject to depreciation. Here again, the measure of recovery might be more or less than the original cost. It should be remembered, however, that the standard of recovery is the cost to the insured—not the price at which he or she expects to sell it to customers. Rules in most states permit use of a market value or selling price clause which converts, for some insureds such as manufacturers, finished stock from actual cash value to "selling price less discounts and unincurred expenses."

A case before a Texas court took a slightly different approach. Here, the court said that "factors, including, but not limited to market value, may be considered, with exception that where there is no recognized market value, market value should be excluded and determination based on remaining factors." This approach is similar to Doelger, discussed earlier. The court went on to say "[t]he courts have not abandoned the consideration of either market or reproduction or replacement values in arriving at actual value to the insured, but evidence of those values may be used as a guide in making that determination rather than a shackle which compels strict adherence thereto." In this case, Mew v. J & C Galleries, Inc., 554 S.W.2d 249 (Tex. App. 1977), the insureds lost considerable property, consisting of jewelry and antiques, in a burglary. The dispute turned around proper valuation for the items, since the insureds had purchased them in order to later sell them at auction. The court agreed that evidence as to purchase price and assigned value of the property was sufficient to show actual cash value.

Occasionally, a piece of personal property may be impossible to replace, as was the case in Iowa Nat. Ins. Co., v. City of Osawatomie, Kan. 458 F.2d 1124 (10th Cir. 1972). Power generating equipment was damaged in a fire. The estimated cost of repairs was $72,000. This type of equipment was no longer being manufactured, so replacement cost with identical equipment was out of the question. Instead, the insured had an outdoor substation constructed to replace the destroyed property. The cost was $60,500, and the insured experienced considerable betterment. Not only did the new equipment have a life expectancy twenty years longer than the old equipment, even when new; the new equipment was also considerably more efficient with twice the capacity. 

The insurance company felt that it was entitled to a substantial depreciation from the $60,500 cost. But the court, looking at the $72,000 estimate for repairing the old equipment, agreed with the lower court that the insured's good fortune was not to be shared with the insurance company. That is, at $60,500, the insurance company was paying less than it would have had to pay to repair the damaged equipment ($72,000). That it was cheaper for the insured to buy better equipment than to repair the old "is not a factor to be balanced in the insurer's favor." 

The broad evidence rule, then, is not to be viewed as a mutually exclusive alternative to the fair market value test or the replacement cost less depreciation test. Rather, it incorporates those two tests to the extent of their relevance and adds to them such other considerations as are required by the unique circumstances of a particular property loss. Rather than adhering to a rigid principle, the broad evidence rule supports the intent of the policy that it be a contract of indemnity—that the insured be in the same economic state after the loss as before. 

Valued Policy Laws

A number of states have what are commonly known as valued policy laws. In general they provide that the full amount of the policy must be paid in case of total loss to the insured property. In other words, the actual cash value of the property in these cases has no effect on the settlement of total loss. For more information on these laws, see Valued Policy Laws, and Valued Policy Laws – State Summary. 

The States Define Actual Cash Value

As of this writing, several states have jumped in with definitions of actual cash value in the state-specific ISO forms. Following is a list of the forms and the definitions.

Alabama:  HO 01 01 04 15, Special Provisions – Alabama, and Alabama Changes – Actual Cash Value, which applies to the Capital Assets Program Coverage Part, Commercial Inland Marine Coverage Part, Commercial Property Coverage Part, Crime and Fidelity Coverage Part, Equipment Breakdown Coverage Part, and Farm Coverage Part. Both forms contain this language: "Actual cash value is calculated as the amount it would cost to repair or replace Covered Property, at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration… Actual cash value applies to valuation of Covered Property regardless of whether that property has sustained partial or total loss or damage."

Arkansas: HO 01 03 10 17 Special Provisions – Arkansas, states in accordance with ARK. CODE ANN.  § 23-88-106:  "Unless otherwise provided by this policy, we may deduct expense depreciation. Expense depreciation is defined as depreciation, including but not limited to the cost of goods, materials, labor and services necessary to replace, repair or rebuild damaged property. If expense depreciation is applied to a loss for damaged property, the insurer shall provide a written explanation as to how the expense depreciation was calculated." So, even though there is no definition for actual cash value, expense depreciation will be applied to loss to damaged property.

Arizona: HO 01 02 11 18 Special Provisions – Arizona, states, "'Actual cash value' means the amount it would currently cost to repair or replace covered property with new material of like kind and quality, less allowance for physical deterioration and depreciation, including obsolescence."

California: HO 01 04 07 20 Special Provisions – California, and IL 01 03 09 07 California Changes – Actual Cash Value, which applies to Crime and Fidelity Coverage Part and Equipment Breakdown Coverage Part. 

HO 01 04 adds the following to any provision that uses the term actual cash value:

Actual cash value for a partial loss to a building or structure covered under Coverage A or B, or a total or partial loss to contents covered under Coverage C, is calculated as the lesser of the policy limit or the amount it would cost to repair or replace covered property, at the time of loss or damage, with material of like kind and quality, subject to a deduction for depreciation.

In the event of a total loss to a building or structure covered under Coverage A or B, actual cash value is calculated as the lesser of the following:

1. The policy limit applicable to that building or structure; or
2. The fair market value of the building or structure.

IL 01 03 contains the following language: "Actual cash value is calculated as the amount it would cost to repair or replace Covered Property, at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence. Actual cash value applies to valuation of Covered Property regardless of whether that property has sustained partial or total loss or damage. The actual cash value of the lost or damaged property may be significantly less than its replacement cost."

Connecticut: HO 01 06 01 19 Special Provisions – Connecticut, states, "Throughout this policy, the following applies with respect to actual cash value as used in regard to loss covered under in Coverages A and B:

The actual cash value immediately prior to the time of such loss shall be the amount which it would cost to repair or replace the building with material of like kind and quality, minus reasonable depreciation. Depreciation, as used herein, means a decrease in value over a period of time due to wear and tear."

Kansas: HO 01 15 06 19 Special Provisions, – Kansas, states, "'Actual cash value' means the amount which it would cost to repair or replace covered property with material of like kind and quality, less allowance for physical deterioration and depreciation, including obsolescence."

Maine: HO 01 18 08 17 Special Provisions – Maine, states, "12. "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. 13. "Physical depreciation" means a value as determined according to standard business practices."" Note that this is the only definition to consider a business-type definition, which might or might not work to an insured's advantage. For example, a business might depreciate tangible property for tax purposes at a certain percentage per year, while a new home would not depreciate to that extent.

Nebraska: HO 01 26 12 17, Special Provisions – Nebraska, and IL 01 22 09 07, Nebraska Changes – Actual Cash Value, which applies to the Capital Assets Program Coverage Part, Commercial Inland Marine Coverage Part, Commercial Property Coverage Part, Crime and Fidelity Coverage Part, Equipment Breakdown Coverage Part, Farm Coverage Part, and Standard Property Policy. The endorsements state, "The following is added to any provision that uses the term actual cash value: 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 obsolescence." Note that in Olson v. Le Mars, discussed earlier, it appeared that actual cash value would equal fair market value; however, that was only if the policy contained no definition of actual cash value. Any policy with either of these endorsements will now contain a definition.

Pennsylvania: HO 01 37 06 07, Special Provisions – Pennsylvania, and IL 01 66 09 07, Pennsylvania Changes – Actual Cash Value, which applies to the Capital Assets Program Coverage Part, Commercial Inland Marine Coverage Part, Commercial Property Coverage Part, Crime and Fidelity Coverage Part, Equipment Breakdown Coverage Part, Farm Coverage Part, and Standard Property Policy. The endorsements state, "Actual cash value is calculated as the amount it would cost to repair or replace covered property, at the time of loss or damage, with material of like kind and quality, subject to a deduction for deterioration, depreciation and obsolescence. Actual cash value applies to valuation of covered property regardless of whether that property has sustained partial or total loss or damage. The actual cash value of the lost or damaged property may be significantly less than its replacement cost."

Texas: HO 01 42 02 17 Special Provisions – Texas, while not containing a definition of actual cash value, the loss settlement provision is clear that property of all types other than jewelry is settled, "at actual value at the time of loss but not more than the amount required to repair or replace."

Washington: IL 01 57 07 02 Washington Changes – Actual Cash Value, which applies to the Capital Assets Program Coverage Part and Commercial Property Coverage Part, states:

 The term actual cash value means:

When the damage to property is economically repairable, actual cash value means the cost of repairing the damage, less reasonable deduction for wear and tear, deterioration and obsolescence.

1. When the loss or damage to property creates a total loss, actual cash value means the market value of property in a used condition equal to that of the destroyed property, if reasonably available on the used market. 
2. Otherwise, actual cash value means the market value of new, identical or nearly identical property less reasonable deduction for wear and tear, deterioration and obsolescence.

West Virginia: HO 01 47 11 14 Special Provisions – West Virginia, While no actual definition of actual cash value, the endorsement contains an explanation. When no other insurance covers real property the loss settlement condition states that, "Covered property losses are settled as follows:

1. Personal property at actual cash value at the time of loss but not exceeding the amount necessary to repair or replace;
2. Real property under Coverage A or B, without deduction for depreciation, subject to the following:

1. In the event of total loss, the limit of liability under this Policy applying to such real property;
2. In the event of partial loss, the total amount of such partial loss, but not to exceed the limit of liability under the Policy applying to such real property.

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