Actual Cash Value Defined by Texas Courts
During a recent mediation, my client was adamant that he was entitled to sufficient insurance money to repair his home. I informed him that his policy was an Actual Cash Value policy, rather than a Replace Cost Value policy, but my explanation was met with a blank stare. It then occurred to me that perhaps lots of people do not know the difference between the two. Therefore, I thought it might be helpful to explain how Texas courts have defined Actual Cash Value.
In St. Paul Lloyd’s Ins. Co. v. Huang, 808 S.W.2d 524 (Tex. App.—Houston [14th] 1991, writ denied.), the insured sued his insurer for failure to pay damages that were the result of a fire. Although the insured believed it was entitled to sufficient insurance funds to repair or replace everything lost or damaged in the fire, the Court pointed out that his insurance policy only provided coverage for the Actual Cash Value of his property, not the Replacement Cost Value. In its decision, the Court noted that:
[w]here the insurance contract provides the measure of damages is the actual cash value of the damaged or destroyed property, it is equivalent to a market value measure of damages.
One way Texas law quantifies fair market value measure of damages means you have to deduct depreciation from the value of your damages. Depreciation represents the normal wear and tear that a property sustains over the course of time. For example, assume you replaced your roof with a new, thirty-year roof at a cost of $30,000. Let’s also assume that you lose $1,000 in the value of your roof for every year that goes by. This loss represents the estimated normal wear and tear sustained by your roof each year. After ten years, the Actual Cash Value of the roof would only be $20,000. However, it would cost you at least $30,000 – and perhaps more – to replace it. If you only have an Actual Cash Value policy, your insurer will only owe you $20,000 for the roof if a windstorm were to destroy it after ten years. This means you will be left without sufficient funds to replace your roof, and you will have to pay the remaining amount out of pocket.
I urge all of you look over your property insurance policy and determine whether you have an Actual Cash Value policy or a Replacement Cost Value policy. If, after reviewing your policy, you realize that you have an Actual Cash Value policy, I recommend you either upgrade to a Replacement Cost Value policy (if you can reasonably afford it), or prepare yourself for the possibility of a large out of pocket expense in the event your property sustains damage as a result of a covered peril. At least you won’t be surprised when your insurer does not give you enough money to replace or repair your damaged property.
Chip,
I realize the difference between ACV and RC although ACV after damages may actually be the market value of the burned down building. The roof is an interesting example although if one buys a home with a new roof verses a 5-10 year old roof the building will sell for the same amount.
Although the whole building is not a roof, it is the whole building. Is it different if the whole building burns to the ground and depreciation has been taken into effect when determining the Market Value (MV) which cam be synonymous with ACV under such conditions (a complete burned down building?
I've never seen a client satisfied with an ACV recovery on a useful building. Look at higher deductible options rather than ACV (or under-reporting values) as a means to reduce premium.
Just a reminder: carefully evaluate the estimated replacement cost while you're checking the policy.
The reported value is not the market value, or the replacement cost shown on a real estate appraisal.
If you have an estimate labeled "replacement cost new" or "RCN", you've probably got the wrong type of estimate.
Be careful if you're engaging an "appraiser". Terms such as "licensed", "certified", "USPAP compliant" are often used to create an illusion of credibility: these terms are not relevant to insurable value estimating projects.
You want a current estimate of the reconstruction cost rather than new construction costs.
You should be able to get one from the insurance agent, but always ask for the detailed report and review the inputs.
Use the 100% value. Don't reduce the value if you elect 80/90% coinsurance option; this removes your cushion, you'll be just as likely to incur a coinsurance penalty as with a policy with 100% coinsurance, but you'll have inadequate limits in a total loss.
You want coverage for the foundation - more often than not it can't be salvaged in a major loss. Make sure the value for the foundation hasn't been deducted from the estimate.
Update the values annually - don't rely on annual "inflation guard adjustments"; these are typically set be the marketing department and have no relation to actual changes in reconstruction costs.
Although my expertise stems from personal property valuation ie rcv and determining depreciation to calculate acv, I do believe that the same basic principles apply.
With regard to your example, I would also suggest that the policy holder reviews the carrier's determination of acv. IMO, "standardized" depreciation is often inaccurate; and careful consideration should be applied to the specific pre-loss condition I.e. annual rain fall, annual hail, insured's upkeep, recent history of repair, etc. The depreciation and/or life span, that the carrier determines/suggests may be self serving and not totally accurate with regard to the specific property in question.
Sergio: Hello! It's sad that these particular insureds get "stuck" (and/or sold" these type of policies when, in fact, they believe they are "fully insured." If they used an ins. agent, it's the agent's fault EVEN THOUGH the ins'd signed the boxes where the agent placed the "x" mark - I guarantee you that if the agent told the insured, "Hey, this ACV policy does not provide indemnification (i.e., protection)at 100% that the ins'd would spend the extra $60-$100 for a policy that protects them IN FULL.
This is akin to selling one's car and only getting the blue book value for same. Sure, your Mazda RX6 (remember that car, Chip?) might seem like it's worth ALOT more to you - the seller - however, the consumer is only interested in the blue book value of the car.
SHIRLEY HEFLIN
The calculation of depreciation for ACV is a challenge.
Before the loss (when premium is the main concern) I've seen very aggressive depreciation estimates. After the loss perceptions change, and the building is remembered as being perfectly maintained in near new condition.
The expense of making an accurate determination before the loss would typically exceed the premium differential to just buy full replacement cost coverage.
John, good point. Reminds me of the 3 book rule here for "book keeping" in NY (one for your accountant, one for the bank, and one for your attorney); all being different versions......
I was educated by my real estate appraisal company before we bought our home in Marina del Sol Estates in Kemah, Texas. Our home was flooded, my yacht was destroyed, it was a nightmare. We hired DuPont Property Appraisers to be our experts in seeing how much the house and land was really worth and recommending our insurance agent to us. I was so educated on the difference between ACV and Replacement cost endorsements I could sing.
Most of my neighbors suffered unrecoverable losses and tears because their insurance agents did not inform them about the ACV default. These insurance companies need to be held accountable for their Nondisclosure of optional endorsements Replacement Cost for Personal Property-Form HO-101 and Agreed Amount on Dwellings Form HO-102.
What I have seen is that when someone is excited about the purchase of a home and believe they know everything about homeownership, they are wrong. Like an ox to the slaughter house, they go straight to a "new" insurance agent who breezes them through the Homeowners policy process, gets them to sign here, and here, and here, and here then gives them the copies, candy and a sticker and says good bye without informing them of the endorsements, or downplay the endorsements by making it sound unattractive just to maintain their book of business for that day. What a shame. Read your policy or get professional assistance and don’t rely on clean white teeth.