I am a licensed public adjuster in the state of Michigan seeking clarification regarding the proper method for determining Actual Cash Value (ACV) for personal property losses under an Allstate House & Home homeowners policy (policy attached).

In a current contents claim, the adjuster for Allstate has proposed calculating ACV by:

1. Identifying a retail "sale price" for a new item (e.g., temporary promotional or clearance pricing at a retailer), and then
2. Applying depreciation to that reduced sale price to determine the final ACV amount.
This methodology is inconsistent with standard industry interpretation of ACV as Replacement Cost Value (RCV) less depreciation. I have found no language in the Allstate policy that supports use of retail discounts as the ACV starting point.

The Allstate House & Home policy does not contain an explicit definition of ACV, nor does it state that discounted pricing is to be used in calculating replacement cost. Under “How We Pay for a Loss,” the policy outlines several options for loss settlement but does not describe how ACV is to be derived.
There is no endorsement modifying the method of calculating ACV.

Question

In the absence of a definition of "Actual Cash Value" in the policy, is it appropriate under standard industry practice for an insurer to:
- Use a temporary or discounted retail price as the basis for establishing RCV, and
- Then apply depreciation to that sale price to determine ACV?

Or, in line with prevailing interpretation (such as that recognized in Smith v. Michigan Basic Property Ins. Ass’n, 441 Mich 181 (1992)), should ACV be calculated as the normal retail replacement cost for new property of like kind and quality, less reasonable depreciation? This method has long been the default approach in Michigan, and nothing in the Allstate policy modifies or overrides it. The term “replacement cost” means the cost to replace with new, not the cost of a limited-time promotional item.

Even standard estimating platforms such as Xactimate, which Allstate and most carriers rely on, establish Replacement Cost Values based on full retail pricing from recognized suppliers. This is aligned with other industry standards and practices.

I am seeking confirmation that normal retail replacement cost pricing for new property of like kind and quality, less reasonable depreciation is the proper method for determining ACV? This method has long stood as best practices and is consistent with proper industry standards.

Michigan Subscriber

You are correct in that actual cash value is determined by taking the replacement cost and subtracting depreciation. That is industry standard. It's not logical to take an already discounted price as the starting price, since that discounted price will change later. The policy specifically states that:

"Under Personal Property Protection–Coverage C, we will make additional payment to reimburse you for cost in excess of actual cash value if you repair, rebuild or replace damaged, destroyed or stolen covered personal property or wall-to-wall carpeting within 180 days of the actual cash value payment."

If a sale price is used to determine ACV, then when the insured has replaced or repaired the property, the insured is then entitled to not only the depreciation deduction but the sales deduction as well, since by the time the property has been repaired the sale may be over and the starting price used to determine ACV was incorrect. 

Also, endorsement 4974 states that when determining acv, the costs to repair/replace may be depreciated. It says nothing about using sale prices. Those prices are flexible and temporary, and are not the price that might be used in 3 months. 

Furthermore, it's standard practice to refer to a desk reference when terms aren't defined in the policy. Merriam-Webster Online defines actual cash value as: money equal to the cost of replacing lost, stolen, or damaged property after depreciation.

Lastly, the Michigan Department of Insurance's Guide to Homeowners Insurance clearly states that acv is: is the replacement cost of the property at the time of loss minus depreciation.