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 28 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