Mid-America Catastrophe Services

The General Contractor Problem: Paying Overhead And Profit In First-Party Claims

 Monday, October 7, 2019

 Matthiesen, Wickert & Lehrer, S.C.

Standard homeowner policies pay personal property claims at actual cash value (ACV), which is the replacement cost (RC) of the damaged property based on its current used condition. In other words, it is valued at what it would cost to replace the property at today’s cost minus depreciation: Replacement Cost Value (RCV) — Depreciation = Actual Cash Value (ACV)

The only difference between RC and ACV is a deduction for depreciation. Both are based on the cost today to replace the damaged property with new property.

More complicated formulas take the replacement cash value, or RCV, which is the cost to purchase the item new, and multiply it by the depreciation rate, or DPR, as a percentage, and the age of the item.

That value is then subtracted from the RCV. For example, a three-year-old dishwasher that costs $500 (ACV) to replace and has a depreciation rate of 12.5% (DPR), or .125, has an ACV of $312.50 {500-[500(.125)3]=312.50}.

States use three types of tests to calculate ACV when a property policy fails to define the term: (1) the fair market value; (2) replacement costs minus depreciation; and (3) the broad evidence rule.
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