Q: A contractor with an ISO commercial general liability policy experienced a property damage claim. There was no question as to fault. However, the carrier says it owes the actual cash value (ACV) for repairs but the agent believes the carrier owes the full cost to repair and has never heard of paying only ACV on a property damage liability claim. Is this standard in the industry or is this carrier trying to cut corners? 

Response 1: Your question is ultimately a question about what constitutes the proper measure of damages in the insuring agreement, which says: “We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies."

Damages are typically to make a person whole, but not to put them in a better position. If by “full cost to repair," you mean the cost to replace the old with the new, that would usually put the claimant in a better financial position.

Because of this, it is my understanding that the usual measure of damages is similar to ACV: the loss of the existing or actual value of the property. However, this is not a hard and fast rule. In some cases, the CGL insurer does pay the full cost to repair the damage. 

The concept of replacement cost is typically one of first-party property insurance—that is, promised in the policy. I would caution against assuming payment ought to be replacement cost. 

Response 2: It depends on the legal venue and fact pattern. Generally, a CGL payment is ACV because it meets the typical statutory definition of “indemnified." For example, if there is damage to a building by a contractor and a claim is made on the CGL, the carrier pays ACV. If the claim is made on the building owner's policy with a replacement cost provision, then that is paid and the building insurer subrogates against the contractor to obtain reimbursement.

With a small loss, the CGL insurer might pay replacement cost rather than dispute actual cash value. The bigger the loss, the more likely an adjuster will consider ACV unless the legal venue dictates otherwise, whether via regulations or case law.

In some instances, a CGL insurer might make a business decision to pay replacement cost because it wants to expedite the closing of the claim without a lengthy subrogation process if the injured party's insurer files a subrogation claim.

Response 3: "Cutting corners" is rather accusatory language. Only paying ACV is the standard in most jurisdictions. There may be a law or regulation in your state that says replacement cost is owed in a liability policy. If so, I am unaware of it. That would be a question for an attorney. However, the carrier is not "cutting corners." It is acting in a customary and standard manner. 

For more, read the article “ACV vs. RC … Which Valuation Method Is Used for Liability Claims?" by Bill Wilson in Property & Casualty Insurance Commentary.

Response 4: This issue has been addressed dozens of times. The amount that is required to be paid for a liability claim is the amount that is or would be assessed by a court in its final judgment. That amount normally takes depreciation into effect and that is what the insurer in this case has offered. The amount to be paid is up to the insurance company. It's not your insured's call, nor is it yours.

If the claimant isn't happy with that offer, they'll need to bring a lawsuit and see if a court will award full replacement cost.

Response 5: If I take my 5-year-old suit that has been worn 100 times to the dry cleaner, whose negligence destroys my suit, do you believe the dry cleaner—and therefore, the dry cleaner's insurer—owes me a new suit?

The dry cleaner needs to legally compensate me for my damages. How is that calculated? Replacement cost at the time of loss minus depreciation satisfies legal liability requirements. From my perspective, ACV is the measure of property damage.

Response 6: In most states, ACV is all that is required to be paid. Many states even allow the labor to be depreciated. The party whose property was damaged should turn in a claim to their carrier. That carrier will pay and then subrogate against your insured and recoup only the ACV.

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

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