Risk & Business Magazine Cain Insurance Risk & Business Magazine Summer | Page 28

CASH VALUE & REPLACEMENT COSTS
Actual Cash Value Vs.
Replacement Cost Policies
BY JOHN CAISSIE, ASSOCIATE LAWYER, FOSTER & COMPANY
C
hoosing the right insurance
coverage for your needs can be
difficult.
For many small businesses,
costs are a factor; however, you
need to be sure that you’re adequately
protected. One question that may arise will
be whether to insure property for actual
cash value or replacement cost. While
insuring for replacement cost may be more
expensive, failing to properly insure your
property could be disastrous when faced
with loss.
In order to better understand which
insurance coverage best suits your needs,
you should first understand what the terms
“actual cash value” and “replacement cost”
mean.
ACTUAL CASH VALUE
While specific policies may define the
terms differently, generally speaking,
“actual cash value” means the fair or
reasonable cash price for which the
property could be sold in the ordinary
course of business and not at a forced sale.
In simple terms, the actual cash value is the
fair market value or what you would expect
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to receive if you had sold the property in
the condition it was prior to the loss. depreciation based on the age and
condition of the building.
In many cases, the actual cash value will
be determined by an appraiser, especially
for buildings and more expensive property. Often appraisers will look at all three
values in order to come to an overall
conclusion as to the value of the property.
To understand how an appraiser reaches
the actual cash value, let’s look at the three
most common ways that buildings are
valued. In some cases, one way of assigning value
may be more appropriate than others and
will be dependent on the circumstances.
In an early Supreme Court of Canada case
(Canadian National Fire Insurance Co.
vs. Colonsay Hotel Co. 1923 SCR 688),
The first is to look at the price that
comparable properties in that area have
sold for. Depending on the type of building
and the market, this may be a very difficult
task, especially if there are no comparable
properties that have sold recently.
The second way is to look at the value
of the building as an investment. This is
often the case when it comes to buildings
that are leased or rented to other parties.
For this, the appraiser will look at the
revenue from the building, or the revenue
it could generate if rented, and assess a
value based on the price that someone
would pay for an investment with that
type of return.
The third manner is to look at the cost of
replacing the property, less a reasonable
the Supreme Court considered a case of
replacement cost as an indicator of the
actual cash value of a property when there
was such a large discrepancy between the
cost of replacement and the anticipated
value that it would sell for.
In that case, a small hotel was only ten
years old when it was destroyed by fire.
Shortly after having been built, it had
sold for $20,000; however, with the
introduction of prohibition in 1918, the
hotel’s business had dried up. The hotel
had been purchased eight months before
the fire in early 1920 for $3,000, including
the contents. The Supreme Court found