Review of the Farmers "Next Generation" Homeowner's Policy, Part 1: Actual Cash Value

Anyone who has made their living in the insurance claims business over the last few years has heard of the Farmers “Next Gen” policy. I thought it would be a good idea to look at this policy and compare it to the standard HO 3 policy. The first stop on this tour is a natural place to begin, the Definitions section. The first definition in the “Next Gen” policy is actually not found in the standard HO 3 policy and that is Actual Cash Value (ACV). Because it is not generally defined in policies, there are tons of cases on the subject. My colleague, Shane Smith, has been writing a great series on calculating ACV in different states.

The “Next Gen” policy defines ACV as follows:

Actual Cash Value – means the reasonable replacement cost at time of loss less deduction for depreciation and both economic and functional obsolescence.
We mat depreciate all replacement costs, including by way of example but not limited to the costs of material and labor. The “Actual Cash Value” of the lost or damaged property may be significantly less than its replacement cost.”

Go ahead and give that definition a second read. I know it took me a few readings to let that sink in. This is a complete redefinition of ACV that will drastically reduce what Farmers policyholders will receive for a covered loss. First, deprecation is traditionally as a result of physical changes to an item brought about by use and the passage of time. Farmers new definition changes the game completely. While depreciation has always been a subjective analysis, this definition adds new components to that subjective analysis. Now the carrier can depreciate an item, if is economically obsolete? If an insured has older items that cannot be replaced but are of little economic value(think family heirlooms that are not true antiques), Farmers can depreciate them to the point were the insured will receive no compensation for the items.

Even with these issues, perhaps the most offensive part of this definition is the depreciation of labor. As I mentioned above, traditionally depreciation was used by insurance carriers to recognize the physical change brought about to items by time and use. How then does labor depreciate? The labor used to paint a wall does not change or lessen in value over time the way the actual paint does. Likewise, the labor of a carpet layer in installing carpet does not lessen in value when children walk across it with muddy shoes. The point is, the labor used to build or repair a home does not change over time the way the materials do and Farmers stating that they will depreciate labor seems to simply be a way to pay less for claims.

Ultimately, I would assume Farmers added in the definition to lessen arguments with insureds over depreciation issues. However, adding to the subjective factors that adjusters can consider will increase litigation between Farmers and their insureds.

With their Next Generation policy, Farmers is boldly going where no carrier has gone before….

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Comments (10) Read through and enter the discussion with the form at the end
Michael Capilli - July 17, 2015 6:59 AM

Thank you Rob for posting this. This is one of the most harmful things done to consumers in the past few years.

Brian Strubhar - July 17, 2015 10:02 AM

As a public adjuster, this is a policy that I always keep an eye out for, as the majority of consumers don't know what terrible coverage, and definitions are written in it... I think next generation policies by farmers are simply a way to sell insurance with little or no coverage, and language that enables farmers to depreciate or deny coverage for about anything... I recommend people find a different policy.

Bill Wilson - July 17, 2015 12:14 PM

Here is an article about depreciation of labor on RC policies:

The language you examined illustrates once again that insurance (auto, homeowners, or anything else) is NOT a commodity where the only material difference is price. Consumers would be well advised to avoid the proliferation of comparative pricing web sites such as Google Compare.

Cal Spoon - July 18, 2015 1:17 PM

Spent the last 2 days in depos.. The carrier's attorney asked me what qualification I had to interpret policy. I replied that I had reviewed thousands of policies. He responded by asking if I thought that was a good enough qualification, implying it was not. So I looked him in the eye, asked him point blank..."is it your testimony that the insurance policy before us, and every other one written before us, is so complicated that an average person cannot understand it? Blink... blink... blink.... Mr. Spoon, will ask the questions... Blink, shuffle paper, next question.

I included that snippet for one reason. The Next Gen policy is just that. In fact, in my experience, less than 1% of the insureds I have ever spoken with understand the policy, the terminology, or how it would apply in any particular situation. If I were an attorney, and so inclined, I would challenge that policy with specific argument. I would have 12 average people attempt to decipher it. When they cannot, well....

Good article Rob.

Scott Sutton - November 23, 2015 4:27 AM

Thanks Robert for a terrific article of important information. Farmers is in example of how the crookedness of Wall Street over the years has culminated to the kind of insurance policies we have today. This just solidifies all the more reason to have a Public Adjuster settle the claim.

Scott Sutton - November 30, 2015 11:43 AM

Thanks Robert for a terrific article of important information. Farmers is in example of how the crookedness of Wall Street over the years has culminated to the kind of insurance policies we have today. This just solidifies all the more reason to have a Public Adjuster settle the claim.

Brian Bell - March 21, 2016 3:54 PM

I was a Farmers agent for 18 years and when the Next Gen HO was coming out----I decided I couldn't sell it and quit. I'm now an independent selling many different Homeowners policies----all with better coverage--IMO

Steve Patrick - May 29, 2016 1:03 PM

Great article Robert. I love your question Cal - excellent. Good for you Brian, perhaps other agents will take the time to read this thing and do likewise. Candidly, allstate, sf and safeco are likely to follow suit and get creative language to greatly limit coverage like this. I do appraisals for a living and these four keep me very busy. I would be out of business if they simply did the right thing.

Sharon Blanton - June 6, 2016 11:43 AM

I am looking to replace my Farmers Insurance policies on my house after 36 years of doing business with them, just because of what I have found out personally about their "Next Gen" policy. I am also changing my automobile insurance which I have had with them for quite a while too. Any suggestions on which companies to get quotes from would be greatly appreciated. Thanks and have a great day!

Ray - September 30, 2016 4:44 PM

I am a Farmers Agent in California our next gen policies come standard with replacement coverage on contents, and not ACV making this article highly misleading. Yes we can make the coverage ACV for reduced premium which sometimes people are willing to do and hypothetically an agent could present it that way and not go out of their way to elaborate on the difference of ACV vs Replacement. 95% of my Next Gen home policies have replacement coverage and I have 100% satisfaction on all 15 of my home claims. this article is like taking a weak point in any optional part of a business and highlighting it.

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