“How much?” may seem a straightforward question, but claims adjusters know it’s much more complicated than that. Foras long as humans have existed, individuals have valued thingsdifferently, monetarily or otherwise.

How are claims adjusters supposed to establish a definitiveprice? The first step lies in establishing the difference betweentwo key concepts—Replacement Cost Value (RCV) and Actual Cash Value(ACV).

Generally speaking, the replacement cost refers to theamount an entity would pay to replace an asset at the presentvalue. The actual cash value, on the other hand, is thecost to replace an item, less depreciation.

It is important that adjusters be aware of any local laws thatcould impact how RCV or ACV are determined. Training via webinarsand seminars, maintaining continuing education credits, andpossibly discussing complex claims with legal counsel ahead of adetermination can help ensure that all factors affecting thevaluation are considered.

Here is a look at how these concepts of replacement cost andactual cash value are established for personal property losses, aswell as techniques to properly value challenging adjustments andhow depreciation can be calculated in a variety of lossscenarios.

Differences in RCV and ACV statelaw

While all states vary to some degree or another in specifics,California has added a wrinkle to their code. Under section 2051(b)(2) of the California InsuranceCode, “actual cash value is the amount it would cost theinsured to repair, rebuild, or replace the item lost or injuredless a fair and reasonable deduction for physical depreciationbased on its condition at the time of the loss.”

Determining pre-loss condition can be difficult following aperil. In cases where fire is involved, it’s difficult enough todetermine what the item is, let alone the state it was in prior tothe loss. It is important to speak with the policyholder to gain asmuch insight into what was damaged and the factors that couldaffect how their value is determined.

In states in which condition is not included in the definitionof actual cash value, actual cash value is generally defined asreplacement cost less depreciation.

Talking to the policyholder to learn about the history of anitem can help in establishing its value. (Photo: iStock)

Determining value on obsolete and uniqueitems

Obsolete items are defined as items that no longer have any generaluse, are out of date, outmoded or otherwise replaced by somethingnewer or better. The Latin term for obsolete means “to fall intodisuse.”

In these cases, it’s important to remember the saying, “Oneman’s trash is another man’s treasure.” Something that istechnically obsolete may hold considerable value for the insured.This principle applies to unique items as well.

As a first step, it is imperative to talk to the insured toestablish value. It is necessary to understand exactly what theitem is, how it is used and whether it has value to that individualtoday. In these cases, adjusters can gain insight into items priorto establishing a like, kind and quality (LKQ) replacement cost byinterviewing the owner, but it is important to drill deeper, andrequest supporting documentation, measurements and pre-lossphotos.

Further methods to determine value include:

• If the policyholder has little to no supporting documentation,consider consulting certified expertsfor rare, unique orhigh-ticket items. Be sure to verify their credentials and makesure their reports will hold up in court.
• Consider the internet in conjunction with basic knowledge ofthe items as a resource; but caution should be used when dealingwith internet pricing.

The key to determining replacement value is finding a like, kindand quality item. Any time there is a claim with potentiallyobsolete items, it is important to reach out to management todetermine the company’s position, as well as any relevant case lawto ensure that valuations complement jurisdictional rules prior tomaking a decision.

Challenges with antiques

Just because something is old doesn’t mean it is necessarily avaluable antique. Items need to meet a certain set of criteria interms of age and identity. Generally speaking, an item must be atleast 100 years old to be classified as an antique. Many times,claimed antiques are simply old personal property items usuallywith high sentimental value.

Adjusters should get as much information about the particularitem as possible so there is sufficient information to determinelater if the object is an actual antique. It is important tophotograph the item and record any additional information about thebrand, condition and size.

Several different methods can be used to determinedepreciation on items damaged in a loss. (Photo: iStock)

Calculating depreciation

The United States Federal government standard depreciation guideknown as the JointMilitary Industry Depreciation Guide (“JMIDG”), is an exampleof a depreciation guide some use as a reference in determiningdepreciation. It is widely used to establish the asset’s actualcash value—the replacement cost minus depreciation.

Depreciation is determined by considering, among other things,the type of article involved, its costs, condition when lost ordamaged beyond economical repair, and the time elapsing between thedates of its acquisition and accrual of a claim.

Some common techniques for calculating depreciation include:

• LKQ valuation – provider can applydepreciation using various approved software programs.
• Flat-rate rule – applies the same rate to allitems within similar categories.
• Expert appraisal – if an agreement cannot bereached, the insurance policy allows for an appraisal in order tomitigate any conflict.

There is one more saying to remember when determining an item’svalue, “The devil is in the details.” I have in my possession afine watch that is similar to a model made by Calvin Klein. It isalike with one crucial difference, instead of the famous fashiondesigner’s name on the back; it reads “Calvin Hill,” which is thename of a Dallas Cowboys football player. When determining RCV andACV, these small differences have a big impact onvaluation.

Scott Lacourse is a director at Enservio,a provider of contents claims management software, paymentsolutions, inventory and valuation services for property insurers.He can be reached at [email protected].

Related: Using a home inventory to document an insuranceloss