WORK PRODUCT OF MATTHIESEN, WICKERT & LEHRER, S.C. Page 2 Last Updated 1/13/22
An exception to this rule would be if the policy provides for RCV endorsement as part of the Collision and Comprehensive Coverage. Terms to be familiar with in first-
party insurance claims include:
Actual Cash Value (ACV): A measure insurance companies use when deciding how much to pay for a damaged vehicle. It is also sometimes referred to as “Actual
Cost Value.” It’s commonly defined as the cost of replacing the insured property, less depreciation for age, wear and tear. (“depreciated replacement cost”). Some
courts have held that ACV is equal to FMV, rather than the depreciated replacement cost.
Replacement Cost Value (RCV): This is the amount of money necessary to purchase the same or similar product at today’s prices, even if it’s more than the insured
paid for the product originally. With replacement cost coverage, many insurance companies will pay the ACV of an item and require the insured to submit a receipt
for the new item before paying you the remainder. “Replacement cost insurance” is optional additional coverage that may be purchased for casualty insurance to
insure against the possibility that the improvements will cost more than the ACV and that the insured cannot afford to pay the difference.
Fair Market Value (FMV): This is the reasonable sales price which a willing buyer and seller, knowing comparable prices in the market and knowing all relevant
facts related to the subject property being sold, would agree to. Three well-recognized guides to appraisal have evolved, all of which take the property’s pre-loss
physical depreciation into account: (1) the cost approach; (2) the comparable sales approach; and (3) the income or economic approach.
Whether or not to include sales tax in a first-party claim payment has been closely looked at in recent years. Sixteen states (AZ, CT, CA, CO, IL, KY, MD, NE, NJ, NV, OH,
OK, PA, VA, WA, and WI) have insurance commissioners/departments which have cited insurers for failing to include or properly calculate tax on their auto claim
payments. Most states do provide some guidance as to whether sales tax (possibly including title and registration fees) should be included in the payment of auto total
loss claims. However, many others (DE, DC, ID, LA, MA, MI, MT, NH, NM, NC, NE, TX, and WY) remain silent regarding whether, when, and in what amounts sales tax
must be paid when settling claims on auto total losses.
THIRD-PARTY CLAIMS
“Third-party claims” are auto liability claims made by the owner of a damaged vehicle against a third-party tortfeasor (person other than the insured and insurer) or his
liability insurance carrier for negligently causing damage to the owner’s vehicle. Third-party property damage recovery is governed by applicable state tort damage laws
and varies from state to state. Whether sales tax can be recovered in tort from a third party depends on the tort and damages laws of the state(s) involved. The third-
party liability insurance company will be responsible for damages caused by its insured. The extent of those damages depends on the damages law of the state(s) involved
as well as possible unfair claims settlement practices laws and/or regulations which may include such third-party claims. First-party RCV insurance claim payments cannot
be recovered as damages in third-party subrogation cases because the default rule for measuring direct damages from partial destruction of personal property is either
the reasonable cost of repairs or the difference in the market value immediately before and immediately after the damage to such property at the place where the
damage was occasioned. J & D Towing, LLC v. Am. Alternative Ins. Corp., 478 S.W.3d 649 (Tex. 2016). For both real and personal property losses, the general rule of
recovery in many jurisdictions is that a property owner can recover the cost of replacement, repair, or restoration of property, unless the damage is permanent, and the
restoration cost will exceed the diminution in the fair market value of the property, in which case the damages are limited to the diminution in fair market value. In other
jurisdictions, the damages rule allows recovery of the difference between the FMV of the property before the loss less the FMV of the property immediately after the
loss.
NOTE: On occasion, damaged property does not have a typical “market” in which such items are bought and sold, calculating damages becomes much more complicated
and confusing. Property such as municipal utility poles, signs, school buildings, landmarks, statues, etc., have a “service value” (a/k/a “use value”), but have no traditional
market to aid in determining the damages owed by someone who negligently damages such property. Intrinsic value is the reasonable value of property to the owner in
the condition the property was in when it was damaged, excluding any fanciful or sentimental consideration. Trinkets, etchings, books, pets, family documents,
household furniture, jewelry, silverware, family records, clothing, and personal effects are examples of property that do not have a realistic FMV because they are not