When reading insurance policies it can be confusing to a policyholder regarding the differences in valuation of real property and personal property when terms like “fair market value”, “actual cost value”, and “replacement cost value” are referenced without explanation. Insurance companies use these terms as if everyone should understand their meaning and sometimes, these terms are used in a context that almost seem like they are interchangeable. However, these terms are not interchangeable because these terms may affect the valuation and actually will dictate what is to be paid under the insurance policy.

In California, Insurance Code 2071 and case law defines these terms and guides insureds as to what should be paid under the policy according to these confusing terms of actual cost value and fair market value. Insurance code 2071 is clear in that “Actual cash value,” as used in loss settlement provisions equivalent to that found in standard form fire policy, meant fair market value, not replacement cost less depreciation, in absence of contrary agreement between insurer and insured.1

Insurance Code Section 2071 provides that the insured is compensated for loss “to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality….”

In Jefferson InsuranceCompany v. Superior Court,2 the California Supreme Court held that “[a]ctual cash value,’ as used in section 2071 … is synonymous with ‘fair market value.’” Furthermore, the court stated, “it is clear that the Legislature did not intend the term ‘actual cash value’ in the standard policy form, set forth in section 2071 of the Insurance Code, to mean replacement cost less depreciation.”

In Jefferson, the insurance company sold a policy to a hotel owner that that suffered a fire loss. The matter went to appraisal and complications in valuation occurred but still resulted in an appraisal award. The insurer petitioned the supreme court to compel the trial court to set aside its order vacating the appraisal. The California Supreme Court denied the petition and in doing so held that actual cost value was synonymous to fair market value and does not mean replacement cost less depreciation. The court explained why the language of the loss settlement clause indemnifying the insured “to the extent of the actual cash value of the property [not to exceed the amount which it would] cost to repair or replace the property” could not mean “to the extent of the replacement cost less depreciation [not to exceed the amount which it would] cost to repair or replace the property.”

Generally, this type of interpretation would make no sense because, by definition, replacement cost less depreciation can never exceed replacement cost without depreciation. “If ‘actual cash value’ had been intended to mean replacement cost less depreciation, the Legislature would not have used ‘the cost to … replace the property” as a limiting factor.

Valuation in property damage is complicated and often subject to interpretation. Without the proper interpretation of definitions under the insurance policy an insured may find they are not receiving the right valuation of their property loss.

1 West’s Ann.Cal.Ins.Code §§ 2051, 2071.
2 Jefferson Ins.Co. v. Superior Court, (1970) 3 Cal.3d 398.