The Do-It-Yourselfer: How To Value The Cost Of Repair – Claims Magazine

Issue

When the insured does the work him-or-herself, would the "actual cash value" be calculated differently than if a contractor does the work? Would the calculation of replacement cost be treated differently?

Actual Cash Value Recovery

By definition, a do-it-yourselfer is one who actually repairs or replaces damaged property. Thus, under a replacement cost policy, the do-it-yourselfer would be entitled to recover replacement cost, as opposed to actual cash value. However, there are circumstances when an actual cash value recovery is greater than a replacement cost recovery. See When Actual Cash Value Is Greater Than Replacement Cost, below. In such instances, the insured may elect to receive actual cash value.

Also, a do-it-yourselfer may have insured the property at actual cash value. This might be the case, for example, with a small business that elected the actual cash value option of a businessowners policy.

When the do-it-yourselfer recovers actual cash value, the measure of actual cash value allowed him or her would be the same as the actual cash value recovery allowed the insured that hired others to replace. See Ghoman v. New Hampshire Ins. Co., 159 F. Supp.2d 928 (W.D. Tex. 2001). This is so regardless of whether ACV is defined as market value, replacement cost less depreciation, or according to the broad evidence rule. Actual cash value, when defined as replacement cost less depreciation, is determined on the basis of an estimate of necessary costs for repair or replacement, not on what is actually spent. The Ghoman court reasoned that the fact that the insured did not actually incur some of those costs because he made some of the repairs himself is legally irrelevant. The insured "contracted for the actual cash value of his loss. His recovery is not tied to the repair or replacement of his property." Id. at *5. The court agreed with the Alabama Supreme Court in State Farm Cas. Co. v. Ponder, 469 So.2d 1262, 1266 (Ala. 1985) (Homeowners replacement cost provision entitled insureds to ACV, although they chose to rebuild the dwelling themselves at a cost less than ACV).

Some courts become confused on this point. In Weidman v. Erie Ins. Group, 745 N.E.2d 292 (Ind. App. 2001), the court overlooked the distinction between an actual cash value and a replacement cost recovery. The court required an insured who was considering making repairs himself to repair or replace before receiving the overhead and profit component of actual cash value.

Replacement Cost Recovery

When an insured elects to repair or replace him-or-herself and to receive a replacement cost recovery, then there is an issue as to how much of the overhead and profit the insured should recover, since there is generally a cap on replacement cost recovery at the amount "actually and necessarily spent" to repair or replace the property. There is also a question regarding how to value the insured's labor in light of the cap at the amount "actually and necessarily spent."

Labor

Since the cap on recovery is the amount actually and necessarily spent, how much should a do-it-yourselfer be reimbursed for his or her own labor? An adjuster might determine what a professional contractor in that field would charge for doing the same job, and use that figure as a cap on the insureds' recovery. For example, if a contractor were compensated at the rate of X dollars per hour and estimates that it would take him or her 10 hours to complete the job, the maximum amount that the insureds would be allowed to recover would be 10X. This would be true even if the insureds took more than 10 hours to complete the job. But if the insureds were able to complete the job in 6 hours total, then they would be entitled to a recovery of 6X. The same analysis could be applied if the contractor bid on a per job basis, rather than on an hourly one.

Overhead

If an insured is not in the business of doing the type of repairs needed on the type of property in question, calculating the amount of overhead may also require some creativity. Overhead for a professional contractor includes general expenses not chargeable to any particular job. For example, such overhead expenses may include rent, heat, light, power, general insurance premiums, travel, legal expenses, and general payroll. For a business or homeowner doing its own repairs, overhead might include increased costs such as higher electric bills, higher water bills, and more transportation and phone expenses than would normally be incurred. If it is necessary for an insured to take time off from work to complete the repairs in a timely fashion, the insurer may also want to consider the insured's loss of wages.

One court has held that where an auto dealership policy entitled the insurer to request the insured to make its own repairs and be paid "the actual cost," the actual cost included overhead. See Vern Eide Buick, Inc. v. United States Fid. & Guar. Co., 273 N.W.2d 116 (S.D. 1978). The court reasoned that the term "actual cost" was ambiguous. If the insurer wanted to exclude overhead from the recovery, it could have done so explicitly. Since standard policies cap recovery at the amount actually spent, it may be reasoned based on Vern Eide Buick that overhead will be included in a replacement cost recovery of a do-it-yourselfer.

Profit

If an insured replaces the property himself, one could argue that he is not entitled to recover profit, unless he is a commercial insured in the business of doing the same type of repairs as are needed on his own property. If he is such a commercial insured, then repair of his own damaged property will use time that would otherwise be devoted to repairing the property of others. In that event, he may be entitled to recover profit. If he does not recover profit, he arguably will not be fully indemnified.

If the insured is not a commercial insured who repairs property of the type damaged for a living, then the insured may not be entitled to recover an element of profit. Replacement cost recovery is limited to the least of the policy limit on the property, the theoretical replacement cost for like quality on the same site, or the necessary amount actually spent. If recovery is limited by the third of these three limits, then a do-it-yourselfer arguably cannot recover profit on the job done because there was no element of profit that was actually spent. In Vern Eide Buick, discussed above under Overhead, where the insured was entitled to recover "actual cost" of making his own repairs, the insured and insurer agreed that an element of profit was not included.

The insured may argue that a fair measure of his profit would be the amount of profit used in calculating the theoretical cost of replacement. However, the policy sets forth three separate caps on recovery. One is a theoretical measure of replacement cost; another is the amount actually spent. It is mixing apples with oranges to take the profit from one and use it in calculating the other.

When Actual Cash Value Is Greater Than Replacement Cost

Why would an insured that completed repairs himself elect to receive an ACV recovery rather than a replacement cost recovery, even though the ACV recovery does not include betterment? In an ACV recovery, as discussed above, profit is included in the calculation, although depreciated. If the amount actually spent, which does not include profit, is less than the ACV, which does include a depreciated amount of profit, it benefits the insured to elect an ACV recovery. This circumstance might present itself with respect to a new home. Suppose there is a $20,000 actual cash value loss of which $2,000 represents profit. The home is new, so the $20,000 figure represents both RC and ACV because the home has not suffered any depreciation yet. To repair, the insured actually spends $18,000. The insured benefits by taking an ACV recovery.

Conclusion

The actual cash value of a loss is the same for those who do repairs themselves and for those who hire a contractor. In contrast with the actual cash value, which remains the same, the replacement cost may be less for one who repairs himself than it is for one who hires a contractor. It may be less because of the cap on a replacement cost recovery at the amount actually and necessarily spent, and in light of the fact that the insured who repairs himself arguably will not recover an element of profit unless he is in the business of making that type of repair. Also, he may receive less with respect to the elements of labor and overhead, in light of that same cap on recovery.