In “Insurance 101” we learned that ACV equals replacement cost less depreciation is written in stone. This decision seems to be an aberration that violates the rule. However, courts have decided against a deduction for depreciation in a number of other cases. The leading New York case, Lazaroff v. Northwestern National, was decided in 1952 and affirmed on appeal. 5 Pennsylvania courts have also come down on the side of no deduction for depreciation for partial losses. In William Kane, et al. v. State Farm Fire and Casualty Company, et al., the Pennsylvania Superior Court, which was confirmed on appeal, ruled:
[*P19] From these cases, we conclude that in partial loss situations, in the absence of clear language [***24] to the contrary, an insurer may not deduct depreciation from the replacement cost of a policy and that the phrase “actual cash value” may not be interpreted as including a depreciation deduction, where such deduction would thwart the insured’s expectation to be made whole. Where qualifying language is absent and an insured is promised “actual cash value,” the insured is entitled to the cost to repair or replace the damaged property.
In a more general sense, the New York Court of Appeals (New York’s highest court and, at the time of the decision, probably the leading court for insurance matters in the United States) dealt with the meaning of ACV in McAnarney v. Newark Fire Insurance Company. 7 McAnarney posed an interesting problem for the court. In 1919 McAnarney purchased seven buildings designed for use as a brewery for $8,000, and in January 1920, insured them with various insurance companies for a total of $60,000. 8 The amount of $60,000 was probably a reasonable valuation based on replacement cost less depreciation. The buildings were destroyed by fire in April 1920.
McAnarney submitted a claim for $60,000 based on replacement cost less depreciation. However, the 18th amendment, which prohibited the manufacture, sale, or transportation of intoxicating liquors in the United States, had been ratified on January 16, 1919. Because that greatly affected the value of the buildings, the insurance companies disputed the claim. They pointed out that McAnarney had been unable to find a purchaser for the buildings...