Should Depreciation Be Taken on Partial Losses When Determining Actual Cash Value?

The term “actual cash value” is a nebulous term. There are many disagreements about what it means. I suggest that is why many states follow the “broad evidence rule,” which allows many measures to be considered when determining the result.

Yesterday’s post, Can a Policyholder Use Replacement Cost Benefits to Remodel or Replace at Another Location? What is the Standard to Collect Replacement Cost Benefits? The Three Prong Limitation, noted a prior post, Replacement Cost Implications by Replacing at Another Location: Answering the Question if You Have to Repair or Replace at the Same Premises to Obtain the Holdback of Full Replacement Cost Benefits. That earlier post quoted some older cases indicating that depreciation should not be taken on partial losses when determining actual cash value. 

This is no longer true in many states. For example, the Tennessee Supreme Court clarified its rule, stating:1                 

We are of the opinion that the action of the Court of Appeals in Third National Bank…does not overrule, but, on the other hand, supports Newark Fire…specifically held that depreciation should be deducted from replacement cost.

A fire insurance contract is a contract of indemnity. Its purpose is to reimburse the insured; to restore him as nearly as possible to the position he was in before the loss. The replacement-less-depreciation rule and the broad evidence rule operate to accomplish indemnity.

The application of a replacement-with-out-depreciation rule, as contended for by plaintiffs, would frequently reap a profit for the insured, although it could result in a loss. Exhibit 3 to the complaint indicates that plaintiff Braddock’s roof was 15 years old at the time of loss and that a new roof would cost $247.00.

Obviously, the ‘actual cash value’ of the old roof, which was 15 years old, must have been considerably less than the cost of a new one. If he should recover the cost of a new roof, as contended for, he would have made a profit on the loss. The ends of indemnity would not have been served. The question of whether Depreciation could be considered in determining actual cash value was not an issue for decision by the Court of Appeals in Third National Bank. As we have above pointed out, it was properly submitted to the jury along with all other factors under proper instructions which the Court of Appeals approved.

Policyholders and public adjusters should first read the insurance policy for definitions and valuation rules regarding actual cash value. The applicable state law then needs to be considered because states have various rules that apply to the policy language regarding actual cash value.

Thought For The Day     

The only way to deal with ambiguity is to embrace it.

—Erich Fromm

1 Braddock v. Memphis Fire Ins. Corp., 493 S.W.2d 453 (Tenn. 1973).