Q

We are an independent adjusting firm. We have been hired to handle a bad house fire. The home and the personal property were a total loss. The policy provides replacement cost coverage for both the dwelling and the personal property.

The insurer is balking at paying the sales tax on the replacement cost of the personal property. It wants to pay tax only on the actual cash value (ACV) amount.

What's your opinion?

Texas Subscriber

A

Replacement cost is just that. Whatever it takes to replace the damaged property with property of like kind and quality—including sales tax, installation charges, etc. Actual cash value (ACV) is typically defined as “replacement cost less depreciation.”

If a shirt sells for $50 plus $4 tax, then its replacement cost is $54. The ACV of this shirt would be $54 less depreciation.

The insured must first make a claim for the actual cash value of his contents. Then, upon completing the replacement process, he submits a claim to the insurer for the difference. The claim for the difference must be made within 180 days after the loss.