“The Relationship between Actual Cash Value and Market Value,” by David L. Clark, MAI, and Larry W. Stark, MAI, examines the lack of consensus in the definition of actual cash value, or ACV, by insurance companies and how it has led to a long history of confusion and litigation on this type of insurance policy, as well as how appraisers can help develop clearer terms for what constitutes the ACV of a property.
According to the article, ACV insurance policies are often used to save money on premiums, since they are usually cheaper to issue. They may also be used for high-risk assets, such as buildings in need of extensive renovation or those in hazard-prone areas where replacement cost policies may be harder to purchase.
The article presents three approaches courts commonly use to measure the ACV of a property to settle legal disputes between an insurance company and the insured: determine fair market value, or the price a willing buyer would pay to buy property from a willing seller in a free market; calculate replacement cost less depreciation; and determine value set by the broad evidence rule, which requires the insurer to consider added evidence like the taxable value of the property, prior attempts to sell the property and economic concerns.
The authors suggest that although ACV can be defined, insurance companies rarely do because they want to reserve the right to dispute the claim of the insured — and appraisers should develop a clear definition of ACV approximate to market value, and defend that definition with knowledge of the inconsistencies in definitions supported by other sources.
For the complete article: Here