After a major disaster, many businesses are able to survive only because of the coverage they receive from an insurance company. In theory, insurers will provide the funds a business owner needs to repair structural damage, ruined property, and other losses once the owner has paid the deductible. However, attorney Bill Voss knows all too well that while you are calculating property losses after a hurricane, your insurer is doing the same thing—and your numbers aren’t likely to match.
How Does the Insurer Calculate the Actual Cash Value of Damaged Property?
Property damage policies provide payment for the repair or replacement of the items a policyholder has lost. This payment is not based on the owner’s estimation of how much an item will cost to replace, but rather on the insurer’s estimation of how much the lost item was worth immediately before the loss. This is known as the actual cash value, or ACV.
In most cases, insurers calculate ACV by taking the replacement cost and subtracting the depreciation on the insured item. For example, if your company lost a computer that cost $1,000 eight years ago, your insurer would not cover the eight years of lost value (depreciation) on the destroyed property. It may cost $1,300 today to replace those items, but the insurer may only pay the ACV, or $1,300 minus the depreciation—and in this case, the depreciation may be as much as $1,000 per year.
Depreciation is calculated using the claimed item’s age and the condition that the item was in while it was still in working order. The level of wear and tear on an insured item can devalue a claim significantly, and a policyholder may lose even more if the lost technology is now obsolete and cannot be replaced with a “like” item.
There are a few instances when policyholders may be able to recover more or less than the ACV of an item, including:
- Recoverable depreciation. Some policies allow claimants to recover the amount of lost depreciation on damaged items. Generally, the claimant will receive payment for the ACV first, then receive another payment for the depreciation once repairs are complete.
- Stated amount. If you have purchased a stated amount policy, the maximum amount you may receive for a total loss is the sum agreed upon in the policy. Owners with this type of coverage must update their policies every year to make sure that the amount they receive would cover the full cost of recouping all their losses.
- Future resale value. Most ACV provisions prevent the insured from recovering losses to the property’s future market value. However, certain policies may allow for policyholders to recover value if an item is significantly devalued due to the fact that it has been repaired—even if the repair restores the item to working condition. For example, a luxury car may lose thousands in fair market value after it has been involved in a collision, even if the repairs have made the crash undetectable.
- Endorsements. Some properties may qualify for special valuation other than replacement cost or actual cash value. A policy that includes certain endorsements may permit the lost items to be valued at the cash selling price or may allow policyholders to be reimbursed for expenses.
Insurance companies are typically overrun with claims after a hurricane, and they may deny or undervalue claims in an effort to retain as much of their profits as possible. In order to ensure that they get fair value for their losses, policyholders should file claims as soon as possible after the damage has occurred and speak with a claims attorney immediately if they have received a denial.
If you are having trouble collecting the full amount of your hurricane claim from your insurer, fill out the form on this page today to contact the Voss Law Firm or order a free copy of our book, Commercial Property Owners Must Read This BEFORE Filing an Insurance Claim.