What is “ Actual Cash Value” on a Property Loss?
The amount of loss payable on commercial and residential property policies is generally limited to the actual cash value of covered property at the time of the loss or damage, unless a replacement cost provision applies. In policies that cover property on a replacement cost basis, the policy generally pays actual cash value of the damaged property until the property is actually replaced. What is "actual cash value"? Actual cash value is not defined by the policy. Based on a number of Texas court decisions, actual cash value is said to be synonymous with "fair market value" — the price a willing purchaser who is under no obligation to buy would pay to a willing owner who is under no obligation to sell. This price can be quantified in one of three ways: (1) comparable sales; (2) the income capitalization approach; or (3) the cost of repair or replacement less depreciation. Over the years, Texas courts have used, modified or interpreted the above criteria to fit particular circumstances in each case.
When the appropriate measure of actual cash value is the cost of repair or replacement less depreciation, a question often arises regarding depreciation of labor and the contractor's overhead and profit. For example, the cost to install a roof necessarily involves the cost of roofing materials plus a significant charge for labor and the contractor's profit and overhead. If hail damages a roof and the loss is adjusted on an actual cash value basis, either finally or prior to actual replacement, are all three components subject to a reduction for depreciation?
Most insurance companies will pay only the actual cash value of the damaged building structure(s) until repair or replacement is completed. Upon completion of repairs or full replacement, the insurance company will then pay the additional amount claimed under replacement cost coverage. Having clear understanding of how your claim is being managed with your insurance company and claims representative is crucial for successful settlement.
It is also important to know how your insurance program addresses large losses, general repairs and replacement of structures or personal property, as well as understanding how your policy deductibles will apply.