This week, I will address Kentucky.
To recap, actual cash value (ACV) is typically calculated in one of three ways:
- The cost to repair or replace the damaged property, minus depreciation;
- The damaged property's "Fair Market Value"; or
- The "Broad Evidence Rule" – considering all relevant evidence of the value of the damaged property such as age of the property, the profit likely to accrue on the property, and the property's tax value.
In determining the actual cash value of buildings for insurance purposes, Kentucky courts use the Broad Evidence Rule.1 In Snellen v. State Farm Fire & Casualty Company, the policyholder’s home was damaged by fire. Her policy provided that the insurer would pay the cash value of the damage, up to the policy limit, until actual repair or replacement was completed, at which time the insurer would pay the cost of repair or replacement, without deduction for depreciation. The court held that the policy was not ambiguous and that the insurer would only pay the “cash value of the damage, up to the policy limit, until actual repair or replacement is completed.”2 In other words, actual repair of the premises is a condition precedent to receive those amounts deducted or depreciated from replacement costs. Here, the policyholder had not repaired or replaced or even evidenced an intention to do so. Overhead and profit cannot be depreciated, however the Snellen court held that overhead and profit may be wholly deducted separate from depreciation in order to calculate actual cash value.3 To calculate actual cash value, the insurer started with the replacement value and subsequently subtracted clean-up costs, contractor’s profit, contractor’s overhead, permits, and depreciation.4