While the term actual cash value is typically found in a property insurance policy, it often is not defined in the policy. Courts around the country use four primary methods to give meaning to the term actual cash value when it is not defined in an insurance policy. Those methods are:
(1) replacement cost without deduction for depreciation;
(2) market value;
(3) replacement cost with deduction for depreciation; and
(4) the broad evidence rule.
Indiana has adopted the broad evidence rule as the default interpretation of the term actual cash value.1 Under the broad evidence rule, parties may introduce evidence of every fact and circumstance which would logically tend to the formation of a correct estimate of the loss, such as original purchase price, market value, replacement cost, depreciation, and obsolescence.2
In Thorne v. Member Select Insurance Company,3 the Seventh Circuit Court of Appeals reaffirmed the use of the broad evidence rule in Indiana for determining actual cash value when the term is undefined in an insurance policy. There, Member Select argued that the district court erred in allowing the broad evidence rule as the method for calculating the actual cash value of a fire loss. Member Select claimed that its insurance policy implicitly defined actual cash value as replacement cost less depreciation. Member Select contended that its interpretation was supported by the policy’s juxtaposition of two separate methods by which losses could be settled: actual cash value and replacement cost. The policy provided that when replacement cost is the method of loss settlement, it is calculated “without deduction for depreciation.” The policy also provided that calculation of actual cash value “includes deduction for depreciation.” On this basis, according to Member Select, the term actual cash value meant replacement cost less depreciation. In other words, Member Select was asking the Seventh Circuit to interpret the policy language “settlement will be on an actual cash value basis; this includes deduction for depreciation,” to mean “settlement will be on an actual cash value basis; meaning/defined as replacement cost with deduction for depreciation.”
In rejecting this argument, the Seventh Circuit reasoned that just because actual cash value includes depreciation does not mean it is limited to replacement cost less depreciation. It noted that the various methods courts use to interpret the term actual cash value (market value, replacement cost less depreciation, and the broad evidence rule) account for depreciation. Thus, Member Select’s argument focusing on how the term “depreciation” was used in the policy was insufficient to justify the conclusion that actual cash value meant replacement cost less depreciation, as opposed to being defined by the broad evidence rule. Because the policy did not expressly define actual cash value to mean replacement cost less depreciation, the Seventh Circuit concluded that the district court was right to look to Indiana’s broad evidence rule, despite the policy’s requirement that actual cash value include depreciation.
1 Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349 (Ind. 1982).
2 See, e.g., McAnarney v. Newark Fire Ins. Co., 159 N.E. 902 (N.Y. 1928).
3 Thorne v. Member Select Ins. Co., 882 F.3d 642 (7th Cir. February 12, 2018).