Actual Cash Value Depreciation Deduction and the Broad Evidence Rule

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...rents. The market value of such a building might have been $200,000 or less; insurance companies argued that the Broad Evidence Rule indicated that ACV for such a building was close to $200,000. In certain situations insureds also seized on a broad-evidence valuation approach as a way to reduce or avoid coinsurance penalties for smaller losses. However, even then the typical ACV loss was adjusted on the basis that ACV equals replacement cost less depreciation and that continues to be the case today. Will we see a change in this standard? My guess is that, despite the court decisions, replacement cost less depreciation will continue to be the way insurers want to settle losses. Insureds will have to resort to the courts to recover more than replacement cost less depreciation for ACV losses.

The Situation in Other States

The Broad Evidence Rule is widely accepted, although some states (for example California) specify that ACV equals market value. A few have other opinions or their courts have not resolved the issue. Munich Reinsurance publishes a guide for adjusters dealing with a number of subjects, one of which is the Broad Evidence Rule. With regard to the Broad Evidence Rule, when the policy does not define ACV, the guide shows:

If I Were King

If I could make the rules, I would focus on betterment. That is, is the insured in a better position after the loss is paid than they were before the loss? If so, a deduction is in order. If not, then replacement cost should be the standard. For example, if a fire destroys one apartment in a multi-family dwelling, replacement of structural elements will probably not produce any economic benefit for the insured. Repainting the apartment,...

The strength of the Broad Evidence Rule is its inclusiveness. The problem is that it doesn’t provide a specific method for doing the calculation. “ ”


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