In property damage insurance, one of several possible methods can be used for of establishing the value of insured property to determine the amount the insurer will pay in the event of loss. What method is used depends on the policy and your jurisdiction. Actual cash value or ACV, according to IRMI,1 is typically calculated one of three ways: (1) the cost to repair or replace the damaged property, minus depreciation; (2) the damaged property’s "fair market value"; or (3) using the "broad evidence rule," which calls for considering all relevant evidence of the value of the damaged property. There is a lot of gray area when it comes to insurance companies placing an ACV value or determining depreciation. This blog series will help to inform and explain how ACV has been evaluated in other states and in other cases.
There are a lot of interesting cases and differing opinions on ACV. In the spirit of my love for history and since it’s the weekend, let’s take a look at an old case that discussed ACV. In Mechanics’ Insurance Company of Philadelphia v. C.A. Hoover Distilling Company,2 a May 15, 1908, fire destroyed nearly 127,000 gallons of whisky.
What was the value of the whisky? First, it’s important to understand a little background:
In the usual course of business distillers do not sell at one time all the whiskies stored in their warehouses, but they sell the older and retain the younger to the end that its increasing age may enhance its value…The tax on this article was $1.10 per gallon, and the plaintiff sold it at 90 cents a gallon and the tax, or at $2 per gallon tax paid. Several retail dealers in liquors in Oskaloosa testified that they bought and sold this whisky, that they knew its market value in Oskaloosa, that its value was $2 per gallon tax paid, that its actual cash value and its market value were the same, that the plaintiff fixed its price and they bought, and the whisky was in demand, at that price, and that it sold more readily than other whiskies of like quality. The defendants introduced evidence that the market value of other whiskies was from 29 cents to 90 cents a gallon, that this value depended somewhat upon the age and the brand of the product, and that the actual cash value of the ‘Hoover whisky‘ at Oskaloosa at the time of the fire was from 30 cents to 50 cents a gallon. And there was evidence that there was little, if any, purchase or sale of whisky by jobbers or wholesalers in the town of Oskaloosa.
How did the court handle the determination of the whisky loss sought on the case?
The plaintiff alleged that the whisky burned was worth $124,766.19, and the defendants (15 insurance companies) denied that it was worth more than $37,000, but they (the insurance companies) made no allegation of the cost of replacing it. On this issue the case went to trial. After the plaintiff had rested, the defendants introduced evidence of the cost of the rye, the corn, and similar materials requisite to manufacture a similar whisky, but subsequently withdrew all evidence of this character, and in that state of the pleadings and proof the case went to the jury.
This claim was to be paid primarily on an ACV basis accordingly to the policy but stated, “liability should in no event exceed the cost to the insured of replacing the property.”
[T]he measure under this clause of the policy of the liability to a manufacturer for the burning of a product like whisky, whose manufacture occupies much time and whose age constantly enhances its value, is not the cost of the raw materials for and of the labor requisite to make new whisky, but it is the cost of immediately replacing that product in the most inexpensive way by purchase or otherwise with a similar product of like kind and quality. (emphasis added).
This means to me that the Actual Cash Value of the whisky is the value of the aged whisky that was lost and not the cost of mere ingredients.
Digging a little deeper, I learned that a majority of top-shelf whisky requires a 10-20 year aging process. Check out Moon Mullins article, Whiskey Business: Does Bourbon Really get Better with Age?
Mullins reports that not all whisky needs to be aged as long, while some of the “best” Scotch Whisky3 in the world has aged for over 70 years but a number of premium American bourbons come to full maturity in just five years. In 1954, Bill Samuels started Maker’s Mark, but Samuels waited six long years to sell its first run. Today, the American patience level is low – most people can’t wait in line to deposit a check and use mobile banking, so how would anyone ever start a new aged whisky company? Now, it is possible to purchase sourced whisky or pre-aged sprits from local distilleries. This way a company can establish their name while their homemade concoctions are aging. Looking at what happened in Hoover Distilling, having pre-aged spirits for sale may have led to a settlement of this claim and a compromise in determining the actual cash value of the lost liquor.
1 IRMI is the acronym for International Risk Management Institute, Inc. If you are not a member, you should join.
2 Mechanics’ Ins. Co. of Philadelphia v. C.A. Hoover Distilling Co., 182 F. 590 (8th Cir. 1910).
3 Wiskey vs. Wisky – the common spelling of American Whiskey is now with an E but in 1908, it appears as if we were borrowing from our Scottish or Canadian neighbors who leave off the E. Since the opinion in this case listed it as whisky, that is the spelling used throughout this piece.