California has statutory and case law defining replacement cost and actual cash value, and these laws are incorporated into each insurance, regardless of the policy language. This blog has several posts on the subject, 1 and this post is intended to give you a coherent post for advice on all your questions about calculating ACV and RCV.
Actual Cash Value – Total versus Partial Loss to the Structure
Insurance Code Section 2051 explains how ACV is determined for partial and total losses to a structure. In some cases, the receivable value changes significantly based on whether a loss is assessed in whole or in part. So, the preliminary question is, when is a total loss versus partial?
Finally, a California Appeal Court responded to that question in 2014 after almost a hundred years of uncertainty. In California Fair Plan by Garnes 2 the court held that a loss to the structure is "total" if the structure has been completely destroyed. It is a partial loss if any useful part remains.
Garnes therefore prohibits insurance companies to use the economic total loss formula often used in auto cases. Under that formula, part of the car remains, but the actual market value of the car before the loss is less than the cost of repair or replacement less depreciation. Under Garnes this cannot be used in property requirements.
Actual cash value – Total losses on the structure
When there is a total loss for a structure as defined in Garnes ] According to 2051, the insurance company must immediately make ACV payment of the property's market value at the loss or policy limits whichever is smaller.
How do you determine fair market value? The law does not say. It is generally accepted in the industry that the actual market value is determined by achieving a reasonable market value evaluation from a California certified certifier.
Actual Cash Value – Partial Loss on Structure
For a partial loss of a structure, section 2051 requires payment of the cost of repair, replacement or remodeling with materials of a similar nature and quality, less a fair and reasonable deduction for physical depreciation. . In other words, it is RCV minus physical depreciation. Therefore, the accepted practice is to determine the entire cost of rebuilding and deducting physical depreciation.
Limits on Depreciation for Structural Losses
According to Section 2051 and Regulation 2695.9 f (1), depreciation must be based on the actual age and condition of the goods at the time of the loss and reflect a measurable difference in the market value of the product. Regulation 2695.9 (f) (1) requires this to be stated in writing and provided to the insured.
Under section 2051, structural components that are not normally repaired or replaced as internal wall panels cannot be depreciated. Insurers must consider how that component is treated in any case; not just in the property in question.
Under both parts 2051 and 2695.9 f (1), the insurance company can only deduct physical depreciation. This means that goods such as material turnover tax, labor and overheads and profits cannot be written off.
Future changes to ACV laws?
We are cautious that there is a bill that is currently in treatment California that can eliminate the difference between total and partial tax losses on structural ACV claims. AB 188 would require ACV to be calculated based on partial loss formula in either total or partial loss. Tomorrow, Derek Chaiken from our California office will be publishing a separate blog post addressing our thoughts on the proposed changes. In short, we have mixed feelings about it.
Actual Cash Value – Personal Property
Unlike structural property, there is no difference in California law between total and partial losses. Therefore, the RCV RCV is indicated above, and ACV is RCV minus physical depreciation.
Replacement Cost Value – Structures and Personal Property
RCV is the same if applied to total or partial loss and if applied to personal or structural property. According to section 2051, the remuneration of the measure for RCV is the necessary cost for repair, replacement or remodeling with materials of similar kind and quality.
Challenging Insurer's Structural RCV Estimation
Technically, the law requires the insured to incur expenses over the sum of the ACV payment to receive additional RCV payments. In practice, insurers may in practice be willing to make undeniable advanced payments when the replacement progresses as long as you can prove that the repairs are in progress and the payments are necessary to proceed.
In many cases, however, the carrier will simply issue a replacement cost estimate, deduct depreciation and do nothing until amounts exceeding ACV arise. What happens if the RCV calculation from the carrier is not sufficient to actually replace it?
The Insurance Ordinance 2695.9 (d) states that the insurance company must assure the insured of a copy of any written estimate on which it bases a claim payment. If the insured claims that the repairs exceed the insurer's estimate, the carrier must do one of the following three things:
- Pay the difference between its written estimate and a higher estimate obtained by the plaintiff or
- if the applicant's request requested, immediately give the reason to the applicant with the name of at least one person or entity that will make the repairs for the amount of the written estimate. The insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and which will enable repairs in a manner that meets accepted trading standards for good and work-related construction at no extra cost to the applicant than what is stated in the policy or as otherwise permitted under these regulations or
- reasonably adjust any written estimates made by the insured's repair member or entity of the insured's choice and provide a copy of the adjusted calculation to the plaintiff.
Switching to a new location
There is currently a lot of controversy about remodeling at a new location or buying properties elsewhere. Insurance code section 2051.5 states that an insured person can choose to rebuild at another location or buy a new house and the insurer must base his claim on the replacement cost at the loss site. In other words, you must determine the RCV to be replaced at the loss site, and that number becomes the maximum that the insured can recover by replacing elsewhere.
Reversal occurs because many carriers do not pay for the cost of new land. If an insured buys elsewhere, many insurers determine the value of the land and deduct that amount from the purchase price. A similar result happens if a new country is bought and a new home is built on it. In our view of the law, this is inappropriate. The law does not allow such a deduction. Carriers, however, claim that insurance does not cover land and the insured gets unfairly enriched because they end up with two chips because they are allowed to keep the land at the original loss site. Wherever possible, insured simply cannot replace a new place without even buying the land, and the law does not allow the insurer to make such deductions. We expect to see this play in future court cases.
Since this post is intended to be a single affair to determine RCV and ACV in California 2019, we appreciate any comments you may have about issues we may not have addressed here.
1 See eg Requirements Handling Requirements of the State – California; The Supreme Court of California confirms the California Fair Plan Assets of Garnes, and preserves the interests of homeowners; In California, an insured homeowner can recover the full replacement cost by buying a home elsewhere? Does actual cash value mean reasonable market value or replacement cost minus depreciation?
2 11 Cal.App.5th 1276 (Cal. App. 2017).