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September 1, 2017

It took years of depositions and other discovery to realize that that most of my 2004-2005 hurricane condominium association claims were much simpler to defend than I thought. The center of gravity of these claims was the proper calculation of Actual Cash Value (ACV).

 ACV is a concept used to describe an intangible and subjective value of physical damage. Compare that with Replacement Cost (RC), which is an incurred and reimbursable out of pocket cost. Under most policies, only ACV is owed until repairs are done. Many high-value condominium claim submissions avoided a proper but substantially lower ACV claim by artificially increasing RC in the ACV = RC minus depreciation formula. ACV is a value of loss or damage and arguably should not include the value of undamaged items or future collateral damage during future repairs that may never be done. Many hurricane claims contained an inflated ACV, containing matching and “expected” tear out-related work that should not be included in the RC aspect of the ACV formula. This often amounted to millions of dollars in high rise condominium association claims.

When I finally realized the extent of improper ACV calculations, I hired consultants to review multi-million dollar ACV estimates and remove all of the matching, restorative work, contingent collateral damage, and other items that should not be included in an ACV calculation and would never be part of a true repair. For example, one estimate in an ACV claim contained $2 million for a complete redash of stucco on a multistory condominium building. Why? Because there was a claim for complete window replacement (unnecessary) and the removal of all of the windows was “expected” to cause stucco damage around windows, which was “expected” to cause a stucco matching problem. So, the redash of the entire elevation of the building was claimed, as well as repainting of the elevation as well. Under no theory of indemnity should this depreciated value of $2 million for stucco redash be paid as part of ACV when the stucco was not damaged. And the redash may never happen anyway. The removal of all of the improperly included items reduced a multimillion-dollar claim to one in the low six figures. 

Incidentally, I challenged a couple of appraisal awards on this basis as well before the claims eventually settled. Arguably, an appraisal award ACV calculation should not include matching or tear out-related work either. Only the damaged item should be considered to determine ACV value or damaged items. Now, if an insured does the repairs, and assuming matching and restorative work are all covered, then the insured absolutely should get reimbursed under standard RC coverage. The point here is that ACV should reflect a proper value of the damage and should not include depreciated amounts for things that are not damaged or do not exist yet and may never exist—like the $2 million stucco redash work in my case! The policy covers direct physical loss. Either the value of just the damage should be paid or the incurred repair cost reimbursed.

My take on ACV is entirely consistent with principles of ACV and indemnity, but there is little case law on point. And the “RC” in the ACV = RC minus depreciation is universally perceived to be the complete repair cost versus just the repair or replacement of just the damaged item. That’s a hard perception to overcome because the distinction does not matter for the vast majority of claims where the scope of repair is proportional to the scope of the damage. But it does matter when the RC is manipulated in high dollar claims where the scope of repairs claimed is far greater than the scope of the damage, resulting in an ACV claim that is far beyond any reasonable valuation of the loss. 

The lesson here for Harvey insurers is to adjust claims in good faith and front RC if desired to encourage the insured to make repairs. But take care to estimate, state, and if sued, reserve your right to litigate only a properly calculated ACV when repairs have not been made.