At a reader’s request, this week I will discuss calculating actual cash value of a claim in Arizona.
The Arizona Department of Insurance provides a definition of actual cash value:1
“Actual Cash Value usually means the sum of money required at the time of the loss to repair or replace the property destroyed, less an amount for depreciation. Actual Cash Value equals the replacement cost less depreciation. Most standard home insurance policies cover the contents of your home (i.e., personal belongings) on an actual cash value basis, but it is possible to purchase replacement cost.”
Two Arizona cases have discussed calculation of actual cash value. In Tritschler v. Allstate Insurance Company,2 the Court defined actual cash value as “the current cost to repair or replace covered property with new material of like kind and quality less a deduction for physical deterioration and depreciation, including obsolescence.” This included any cost that an insured would be reasonably likely to incur in repairing or replacing a covered loss, regardless of whether the insured intended to repair or replace the property; thus, if the cost to repair or replace the damaged property would likely require the services of a general contractor, the contractor's overhead and profit fees should be included in determining actual cash value, even when an insured ultimately elects to complete personally the needed repairs.
In Didyoung v. Allstate Insurance Company,3 the Court addressed the situation where the insurance policy does not contain an express definition of actual cash value:
When no Arizona court has previously addressed an issue of insurance contract interpretation, Arizona courts “look for guidance to other jurisdictions that have addressed [the] issue.”Tritschler, 144 P.3d at 525. A survey of the courts that have addressed the issue of an undefined “actual cash value” term reveals some disagreement. See, e.g., Ghoman v. New Hampshire Ins. Co., 159 F.Supp.2d 928, 934 (N.D.Tex.2001) (“Under Texas law, the term ‘actual cash value’ is synonymous with ‘fair market value.’ ”); Kane v. State Farm Fire & Cas. Co., 2003 PA Super 502, 841 A.2d 1038, 1047 (Pa.Super.Ct.2003) (defining “actual cash value” in the absence of “qualifying language” as “the cost to repair or replace the damaged property”); Cheeks v. Cal. Fair Plan Assn., 61 Cal.App. 4th 423, 426, 71 Cal.Rptr.2d 568, 570 (1998) (holding that “actual cash value” means “ ‘fair market value’ not replacement cost less depreciation”). However, no case thus far has interpreted “actual cash value” in the manner offered by the Didyoungs as encompassing the cost of repairing the property to comply with building codes that did not exist until after the loss occurred.
The “plain and ordinary meaning” of the phrase “actual cash value” does not, in this Court's view, include the cost of repairs to upgrade damaged property to comply with building codes that were not in place at the time that the property was damaged. The insurance contract specifies that actual cash value is to be calculated “at the time of the loss.” No plain reading of this provision would stretch it to encompass the cost of repairing the property to a better condition than it was in at the time of the loss. Had the loss not occurred, the Didyoungs would have had to pay for the upgrade to bring their mobile home up to code themselves. Moreover, no court has interpreted “actual cash value” in the way asserted by the Didyoungs. As such, the Court finds as a matter of law that the insurance contract between Allstate and the Didyoungs does not cover the cost of upgrading the property to comply with Navajo County's building requirements. As such, Allstate did not breach the insurance contract in refusing to pay for such upgrades. Allstate's Motion for Summary Judgment is granted on the breach of contract claim.
As you can see, the Didyoung court did not determine how actual cash value should be calculated when it is not specifically defined in the policy, but only determined that it did not include upgrade expenses needed to comply with new building codes.