When ACV is the only valuation you can get

[Rob]

I have a risk which is a restaurant (cold kitchen, lunch/soup type place) in a building built in late 1800's (it has been updated of course). He owns the building. He is building an apartment above the restaurant in which he would live. This habitational is making in ineligible for a BOP with most main street carriers (Hartford, Safeco etc). USLI will write a BOP with the habitational exposure, however they only offer ACV on the building. All of the E&S carriers I've approached will only write ACV due to the year built.

Does anyone have any experience with what happens at claim time when a building such as this, which has been fully updated, is written on an ACV basis? I understand that ACV would be replacement cost less depreciation but I'm just wondering how depreciation is determined. Is it market value at the time of loss? I try never to write property on an ACV basis but it appears this time I'll have no choice and I'm just trying to get a real life feel for how this would impact an insured in the event of a loss.

[gregcw]

Admittedly, I have no direct experience with this but what I tell my clients is that the ACV is calculated at the time of loss, based on each item damaged, i.e. a 10 year old roof, with a life exptecancy of 20 years, would be depreciated by 50% and a ceiling with a life expectancy of 50 years would have 20% depreciation while brand new carpeting would have no depreciation.

This is the reason that carriers are more flexible on the limits of coverage for ACV because they realize that it is your E&O and that, if it is over insured, they collected a more than adequate premium or if it is under-insured that they are still only obligated to the policy limits.

[Rob]

Admittedly, I have no direct experience with this but what I tell my clients is that the ACV is calculated at the time of loss, based on each item damaged, i.e. a 10 year old roof, with a life exptecancy of 20 years, would be depreciated by 50% and a ceiling with a life expectancy of 50 years would have 20% depreciation while brand new carpeting would have no depreciation.

This is the reason that carriers are more flexible on the limits of coverage for ACV because they realize that it is your E&O and that, if it is over insured, they collected a more than adequate premium or if it is under-insured that they are still only obligated to the policy limits.

How would it be my E&O when it is fully disclosed, the insured signs off on it, and there really are no other options?

[gregcw]

It could be on my E&O if the customer relied on my valuation of the property, and recommendation, to set the limits to adequately cover the value of the property. My experience has been that the customer has no idea what the depreciated value even could be in which case they are relying on me for recommendations and advice.

We are also living in an extremely litigious society and one where anyone cans sue anyone else for any reason.

[Rob]

It could be on my E&O if the customer relied on my valuation of the property and recommedation to set the limits adequately to cover the value of the property. We are also living in an extremely litigious society and one where anyone cans sue anyone else for any reason.

Agreed. I put the burden of determing value on the insured and explained ACV in writing. Short of refusing to write the policy, I don't see any other options when there aren't any carriers willing to write replacement cost.

[FurriePrincess]

Perhaps you can approach the underwriter with Functional Replacement Cost. Below is a link to a series of articles on property valuation that were posted over on My New Markets. Excellent info. Read the whole series. http://www.mynewmarkets.com/article_view.php?id=90742

[d's insurance store]

Having been in the business for 25+ years, I certainly understand the concept of ACV settlements...but being able to quantify this for a potential insured has to me, always been abstract and impossible.

Back in my captive days, I had one or two risks that went the budget route with ACV policies for property and suffered minor losses, and for whatever unknown reason, ended up satisfied with the settlements, but I could never get a straight answer from a claim adjuster about anything specific regarding a potential payout.

I mean in the aftermath of a property loss, does the claim adjuster really use one ACV schedule for the framing and plumbing of an older building and another for the updated wiring and glazing, and still another for the retrofitted flooring and insulation and light fixtures? Is the three year old exterior paint adjusted separately from the storage closet that has original lathe and plaster? You see where I'm going with this?

Or does the agent sell for the commission income, pray for no losses and bring in E&O when the loss settlement falls short of putting things back together again? Because even with disclaimers and even signatures, an insured that cannot rebuild is going to be pretty pissed at the time of claim, forgetting everything that was discussed at the point of sale.

And another solution I've seen in my career...the risk ends up at a captive agency office where the agent is too new to know and merely places the risk into the program whether it qualified or not. And then at claim time, the carrier just eats the loss and writes it off to an inexperienced agent.

I sure wish there was a more direct way to handle risks such as this...

[Rob]

Perhaps you can approach the underwriter with Functional Replacement Cost. Below is a link to a series of articles on property valuation that were posted over on My New Markets. Excellent info. Read the whole series. http://www.mynewmarkets.com/article_view.php?id=90742

I checked with the carrier and they will not write functional rep cost.