ACV, by Definition, Requires Depreciation from Replacement Cost
Post 5027
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This case is a putative class action concerning a commercial property insurance policy. Schoening Investment, LP alleges that The Cincinnati Casualty Company breached its insurance policy by undervaluing an actual cash value (ACV) payment for a covered partial structural loss to one of its properties in Schoening Investment, LP v. The Cincinnati Casualty Company, No. 1:24-cv-137, United States District Court, S.D. Ohio, Western Division (March 13, 2025)
Key Allegations:
Schoening contended that the policy does not allow Cincinnati Casualty to deduct any amount for depreciation from the ACV payments due for partial structural losses. Schoening specifically challenged whether the insurer is entitled to deduct depreciation from such payments at all.
Legal Standard:
This putative class action concerned a commercial property insurance policy and a not uncommon grievance-an insured’s belief that its insurance policy entitles it to more money from its insurer than it received. Specifically, Plaintiff Schoening Investment, LP alleges (on behalf of itself and a putative class of insureds in Kentucky and Arizona) that Defendant The Cincinnati Casualty Company breached its insurance policy by undervaluing an actual cash value (ACV) payment it made to Schoening after Schoening suffered a covered partial structural loss to one of its properties. (By partial structural loss, the Court (and Schoening) means structural damage where estimated repair costs are lower than estimated replacement costs.)
The Court applied Kentucky law, which holds that the interpretation of unambiguous terms in an insurance policy is a matter of law. The Court concluded that Schoening’s depreciation-based challenge fail under the unambiguous policy terms.
Schoening contended that Cincinnati Casualty breached its contract in one very specific way. According to Schoening, the policy at issue does not allow Cincinnati Casualty to deduct any amount for depreciation from the otherwise-applicable ACV payments that would be due for partial structural losses. All Schoening challenges here is whether the insurer is entitled to deduct depreciation from such payments at all.
Cincinnati Casualty contended that the policy terms are sufficiently unambiguous on the depreciation issue that the Court should dismiss the suit. The Court agreed with Cincinnati Casualty.
THE VALUATION PROVISION
The Policy informs the reader that phrases in quotation marks (like “Actual Cash Value”) “have special meaning,” as set forth in “Section G. Definitions.” According to the Definitions Section, “‘Actual cash value’ means replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.”
LEGAL STANDARD
To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a complaint must present sufficient facts to state a claim to relief that is plausible on its face. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.
THE UNAMBIGUOUS POLICY TERMS
Schoening asks the Court to manufacture a third valuation method for the Policy which it cannot do. Schoening seeks an ACV-based payment without a depreciation deduction that would mean that, even without selecting the optional replacement cost coverage, insureds covered under the Policy for full replacement cost or RCV.
Further, because the insureds who select the optional replacement-cost coverage can elect to receive ACV-based payments before making repairs Schoening’s reading of ACV would entitle them to receive full-replacementcost-based payments (i.e., without depreciation) without in fact making any repairs directly contravening the Policy wording.
All told, the Court found that, under the unambiguous Policy language, Cincinnati Casualty may deduct depreciation of materials from ACV calculations when evaluating partial structural loss claims.
The Optional Coverage under the Policy provides only two valuation methods-replacement cost and ACV. The latter, ACV, “means replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.” Replacement cost (RCV) is payment “without deduction for depreciation.” Unless and until an insured repairs or replaces a covered property, the replacement-cost based measure is not available to that insured.
Court’s Decision:
The Court agreed with Cincinnati Casualty that the policy unambiguously allows the insurer to deduct depreciation from ACV-based payments for partial structural losses. Consequently, the Court granted the motion to dismiss Schoening’s complaint with prejudice.
ZALMA OPINION
Schoening’s proposed reading would effectively grant insureds who did not pay for nor select the replacement cost coverage, a cost greater than the premium when RCV is not selected, an entitlement to replacement cost coverage, contrary to the policy terms. Schoening tried, by filing a class action, to change the wording of the policy and give the class a benefit for which they did not pay. The court refused to rewrite the policy whose terms and conditions the plaintiff class accepted when it acquired the policy.
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