In a key win for policyholders in California, a California state court trial judge recently found that insurers must consider the actual condition of personal property at the time of a loss when determining the property’s actual cash value.1

The case arose from a class action lawsuit against State Farm General Insurance Company alleging that the insurer’s practice for determining actual cash value for personal property losses violated California law.

The parties had argued for different interpretations of how actual cash value should be interpreted under California law. State Farm argued that the term was synonymous with fair market value of the lost property at the time of the loss. The policyholders argued that actual cash value was the cost to replace an item with a new item of like kind and quality, less reasonable depreciation based on the physical condition of the item at the time of the injury.

After an eight-day trial, the court found in favor of the policyholders. The court concluded that State Farm General Insurance Company’s practice for determining the actual cash value of policyholders’ personal property losses violated California law because it failed to account for the condition of the property at the time of the loss before depreciating the property.

On this issue the court’s ruling stated that:

State Farm’s use of its depreciation guide, based on age and average quality of goods … does not comply with Section 2051(b), because the guide fails to consider the condition of the insured’s personal property at the time of the injury…. [The] evidence at trial [showed] that certain items of personal property were depreciated significantly (50%-80%) without full consideration of their condition at the time of loss.

The court’s ruling also found that State Farm violated the California Code of Regulations by failing to fully explain in writing the basis of the company’s depreciation of the personal property.

The California Department of Insurance had launched an investigation into State Farm’s depreciation practices in 2014, and reached similar conclusions.

This case exemplifies that under California law insurers are required to take into account the actual pre-loss condition of personal property before attempting to calculate depreciation. Insurers are therefore precluded from applying straight-line age-based depreciation to items that might be older but are nonetheless in like-new condition.

Although this is a decision by a trial court—and is therefore not binding on other courts in the state—policyholders can use the court’s decision and reasoning as a roadmap to fight back against insurers that seek to employ similar unfair practices regarding interpreting actual cash value.

1 The Doan et al. v. State Farm General Ins. Co. (Super. Ct. Santa Clara County, April 20, 2016, No. 1:08-cv-129264).