BULLETIN 1983-19
THOMAS V. AMERICAN
FAMILY MUTUAL INSURANCE COMPANY 233 KAN. 775, 666
P.2d 676
October 4, 1983
This Bulletin is to advise of a Kansas Supreme Court case which significantly affects claim settlements based upon the use of “actual cash value” in fire and casualty policies written in this state.
In Thomas, the Court rules for the first time that the term “actual cash value” in an insurance policy means the cost to repair or replace property, without any reduction for depreciation. The date of this decision was July 15, 1983. The court specifically overruled a prior decision to the contrary.; U.S.D. 285 v. St. Paul Fire and Marine Ins. Co., 6 Kan.App.2d 244, 627 P.2d 1147 (1981).
Thomas involved a dwelling owner’s policy and storm damage to the roof of a residence. The policy provided coverage to the “extent of the actual cash value of the property.” The Court noted that “(n)owhere in the policy does it provide that the cost of repair is to be reduced by a depreciation factor and our statutes make no such provision.” One statement in the case is particularly relevant. The Court States “(t)he instant policy does not appear to us to be ambiguous. It does not provide for any reduction in the cost of repairs based upon depreciation and it is not for us to read such a provision into the policy.” (Emphasis supplied)
It is clear from a close analysis of the rationale in this case that the ruling applies not only to dwelling owner’s policies but has equal application to any fire and/or casualty policy which uses the phrases “actual cash value,” or words of similar meanings, without defining the phrase specifically to allow use of depreciation in arriving at that value. One statement in the opinion especially warrants emphasis in that regard:
Under our rules of construction governing insurance contracts, we are of the opinion a reasonable person in the same predicament as appellee would not expect depreciation to be considered to reduce and impair his ability to repair his partially damaged dwelling.
As a result of this ruling, all insurers authorized to write fire and casualty insurance in this state are directed to immediately modify their claims adjustment procedures to comply with this decision and to re-evaluate all applicable claims files in accordance with the Thomas decision. Based upon the research and the opinion of my Legal Division, it is our opinion this decision does not mandate a retroactive application. However, all claim files which were open and pending at the time this opinion was filed, i.e. on July 15, 1983, must be handled in accordance with this decision.
We have already reviewed a number of inquiries and proposed versions of possible policy endorsements defining “actual cash value.” Attached to this Bulletin is a sample endorsement which the Department has reviewed and would approve. However, such endorsements may be imposed only on new and renewal business. This endorsement is designed for use with most “standard” insurance contracts and may have to be adopted to your company’s particular use.
In addition to the effect on claims, this decision may well have a significant effect on some rates presently filed with and approved by this Department. We do not believe it is proper for insurance companies to charge any additional premium for “replacement cost coverage endorsements” to existing policies which are predicated on “actual cash value,” unless the latter term is specifically defined to clearly permit any reduction in value based on depreciation. Therefore, any coverage option affording replacement cost coverage in any “Actual Cash Value” program should now be afforded without additional premium charge, unless appropriate definitional endorsements or provisions are filed and approved.
Please acknowledge receipt of this Bulletin in writing.
Fletcher Bell
Commissioner of Insurance
The term “Actual Cash Value” means:
The amount which it would cost to repair or replace damaged property with material of like kind and quality, less allowance for physical deterioration and depreciation.
N.B. some have suggested some reference to the Kansas Valued Policy Law (K.S.A. 40-905), as respects situations in which a structure is totally destroyed. No such reference is necessary in endorsements of this type as that statute applies in such situations, irrespective of any policy language.