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Most common valuation method
- ACV (actual cash value): cost to replace property with new property of like kind and quality less depreciation
- replacement cost: cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation
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Actual Cash Value
- (+) most prevalent method
- (+) supports the principle of indemnity
- can use replacement cost minus deprecation
- can use market value
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Accounting depreciation and economic depreciation
- accounting: property is expected to have a useful life and is depreciated over that period; most common method is straight-line
- economic depreciation: difference between replacement cost and current market value (results from physical / functional depreciation)
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Market Value
- used by many court as ACV definition
- difficult to establish if there have been few recent transactions involving comparable property
- market valuation: analyze similar transactions (antiques, etc.)
- market value of real property: reflects the value of the land and its location + buildings; most insurance policies don't cover land, so it's removed when establishing insurable value of property
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Broad evidence rule
- a court ruling explicitly requiring that all relevant factors be considered in determining ACV
- factors include: obsolescence, present use and profitability, alternate building uses, present neighborhood characteristics, long-term community plans, inflation trend
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Replacement cost
- ISO HO-3: if ins value is 80%+ of replacement cost - pay lower of liability limit, replace cost, repair cost; else pay lower of limit, ACV, repair minus depreciation
- to reduce moral hazard, most replacement cost policies pay out only after the insured has actually replaced the damaged property
- ACV settlement option: offered so the insured can start repairing, and then has 180 days to refile claim on replacement cost basis
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Non standard valuation methods
- agreed value method: watercraft, antiques, etc. Agree on maximum amount paid in case of total loss
- functional valuation method: insurer is required to pay no more than the cost of repair or replace with property that is its functional equivalent (eg. schoolhouse turned into office, computers, building material)
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