It’s Not Apples to Apples
Ask just about any adjuster or defense lawyer and they’ll tell you that the price list applicable to the loss must be within a month or so of the date of loss. It’s not that simple and in Texas there is no case that discusses the difference between the two calculations.
Actual Cash Value Policy
“Actual cash value” is not defined by the policy. Under Texas law, the term “actual cash value” is synonymous with “fair market value.” See Great Texas County Mutual Insurance Co. v. Lewis, 979 S.W.2d 72, 74 (Tex.App.—Austin 1998, no pet.); Guaranty County Mutual Insurance Co. v. Williams, 732 S.W.2d 57, 60 (Tex.App.—Amarillo 1987, no writ); United States Fire Insurance Co. v. Stricklin, 556 S.W.2d 575, 582 (Tex.Civ.App.—Dallas 1977), writ ref’d n.r.e., 565 S.W.2d 43 (Tex. 1978). “Fair market value” is 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. City of Harlingen v. Estate of Sharboneau, 48 S.W.3d 177, 182 (2001); Atterbury v. Brison, 871 S.W.2d 824, 828 (Tex.App.—Texarkana 1994, writ denied).
Commentators have noted “the timing of valuation is another question left unmentioned by the definitions, but is usually apparent, such as the date of the conversion, date of the gift, or date of the taking in an eminent domain proceeding. See Graves v. Trevino, 386 S.W.2d 831, 834 (Tex. Civ. App.-Houston 1965, writ refd n.r.e.), I.R.C. § 2412(a) (1982), Trinity River Auth. v. Barrett, 497 S.W.2d 91, 93 (Tex. Civ. App.-Houston [1st Dist.] 1973, no writ). Following this general rule, the date of loss for an ACV policy would appear to dictate the pricing list month from which costs are extracted (assuming the pricing list is accurate).
Replacement Cost Policy
Unlike an actual cash value policy, in a replacement cost policy the insurance company is providing coverage for the ‘replacement’ of the damage (which takes time to repair and replace). Unlike ACV, RCV has a ‘replacement time’ component and that time component must envision price changes that occur while addressing the replacement. Again, the insurer agreed to provide coverage for replacement of the damage and that includes paying the going rate at the time the replacement is made.
The policy itself recognizes this time consideration and usually includes a 6 to 24 month (with extensions) provision for completion (and recoupment of recoverable depreciation). While the insurer won’t openly admit this recoverable depreciation time period allows for price changes over that period, the concept of RCV coverage requires allowing time and pricing changes.
This is further complicated when the insurer doesn’t promptly and properly pay the claim–low ball offers don’t provide sufficient payment of ACV to start the work and thus an argument may be made that it isn’t until full and proper payment of ACV is made that these time periods begin (again allowing for price increases). One could certainly argue (when drafting an estimate) that prices (going rate in the market) used in this estimate (based on the economy, supply shortages or whatever market forces are at issue) are anticipated and that for every month the proper ACV is not paid by the insurer the provided estimate is reasonably likely to increase by a factor of X.
Why Do We Use RCV – Depreciation = ACV
Not all things have a known or measurable historical market rate. For example, there is no marketplace for used roofs, old drywall, previously installed gutters, etc. Without a market, no data of past sales exists from which a market rate may be determined. As a result, a different method of calculating fair market value is required. See Religious of the Sacred Heart of Texas v. City of Houston, 836 S.W.2d 606, 61516 (Tex.1992), citing American Institute of Real Estate Appraisers, The Appraisal of Real Estate at 62 (9th ed.1987).
In sum, RCV – Depreciation = ACV is a work-around solution when no resale market exists and provides a hypothetical, alternative method for estimating fair market value.
Disclaimer
This article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this article or any of the e-mail links contained within the site do not create an attorney-client relationship between Thomas W. Hamrick and the user or browser. The opinions expressed in this article are the opinions of the individual author and may not reflect the opinions of other lawyers.
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