By Roy C. McCormick
Actual cash value adjustments by insurers under dwelling coverage of homeowners policies are generally the result of failure to carry insurance at an amount at or above the usual 80% (or other percentage) requirement for replacement cost settlement. Other ACV dwelling adjustments are made as a matter of choice on the part of insureds who elect not torebuild or repair promptly or to never do so. The depreciation taken in such circumstances was the subject of a dispute, as it often is, in a recent and instructive Florida case.
Homeowners insureds, who carried sufficient dwelling coverage to comply with replacement cost requirements, decided not to restore a part of their property that was damaged in a hurricane. Instead, they sought compensation under the following provisions of their homeowners policy:
"You may disregard the replacement cost loss settlement provisions and make claim under this policy for loss or damage to buildings on an actual cash value basis. You may make a claim within 180 days after loss for any additional liability on a replacement cost basis."
Comparable options are offered by insurers in general.
The insurer paid an amount based on replacement cost less depreciation of the damaged portion of the house. Objecting to the reduction, the insureds sued individually and, on behalf of other Floridians whose actual cash value settlements were reduced by depreciation, as a class action. The trial court, with respect to the individual suit of the husband and wife, concluded that depreciation was not deductible and granted summary judgment to them.
On appeal, the insurer stressed the clarity of the pertinent policy provisions and that, when insureds elect not to repair or replace, and choose "actual cash value" settlement, they claim an amount reflecting the value of the property immediately before damage occurred.
The insureds argued that there was no mention of depreciation in the policy provisions under which they made their claim. They also stressed that "actual cash value" was not defined in the policy. Therefore, they contended that a settlement reduced by depreciation was not proper.
The appeal court found no ambiguity in the controlling language and cited precedent for "actual cash value" in an insurance policy meaning "fair market value," a widely recognized appraisal term. Noting a cost approach as a universally used practical guide for determining fair market/actual cash value, it found the application of depreciation essential in the circumstances under review. The insureds had been offered a full replacement cost settlement or an actual cash value settlement that did not require replacement. They chose the latter.
The judgment of the trial court was reversed in favor of the insurer and against the insureds. (American Reliance Insurance Company v. Perez; Florida District Court of Appeals; No. 95-3415; January 8, 1997.) A detailed report of the case is found in Commerce Clearing House 1997 Fire and Casualty Cases, Paragraph 6010.
For insurance purposes, we must be careful that the insured does not confuse replacement cost with market value. The replacement cost of a building is the cost to repair or replace it with similar material at today's prices. Market value is the sale price of property, which is influenced by various factors. Conversations with insureds should, especially, distinguish replacement cost from actual cash value, which is the depreciated value of a building. The actual cash value of a dwelling structure is determined by subtracting the depreciation from its full replacement value.
Most owners of homes do not have funds available to pay the substantial bills presented periodically by contractors during the course of repairing severe damage. Partial payment by an insurer keeps the ball rolling. For example, if an insured sustains a $10,000 loss to the dwelling, the adjuster may determine the ACV of the loss to be $6,000 and issue a draft for that amount. After repairs are completed, the balance of $4,000 is paid under the replacement cost provisions.
Insureds are allowed 180 days to restore dwelling property under the replacement cost provisions of their policies. The value of this feature is demonstrated in catastrophes such as major hurricanes. The damage is widespread, the number of contractors available is limited and time is needed. This is an example of helpful insurance response to a difficult situation.
Homeowners policies that include dwelling coverage must be checked annually to revise limits, when necessary, to comply with replacement cost requirements by keeping them in line with current local construction costs. *