Dallas insurance attorneys need to know the difference between “replacement cost” and “actual cash value” in an insurance policy.
The 1998, Austin Court of Appeals opinion in the case styled, “Great Texas County Mutual Insurance Co. v. Lewis” lends some insight into the differences.
Here is some relevant information:
The facts are undisputed. While covered by a policy issued by the Company, Lewis’s 1989 Dodge Caravan motor car sustained damage to the engine. The automobile had been driven 110,000 miles at the time. The Company inspected the automobile and calculated the cost of repairing the damage to be $3,608.27, which included the cost of a re-manufactured engine, replacement parts, and labor. From the $3,608.27, the Company subtracted the policy deductible of $527.00 and $2,031.72 for betterment or depreciation, leaving a net sum of $1,049.55. The Company offered Lewis that sum to discharge the Company’s obligation under the property-damage section of the policy.
Alleging his coverage did not authorize the $2,031.72 deduction for betterment or depreciation, Lewis sued the Company on his policy to recover the $3,608.27 estimated cost, less the policy deductible of $527.00, together with other sums not in dispute. The trial court concluded the policy did not authorize a deduction for betterment or depreciation and rendered judgment accordingly.
In the Company’s appeal, the sole issue was one of law: whether the language of the policy authorized the deduction of $2,031.72 claimed by the Company for betterment or depreciation.
DISCUSSION AND HOLDINGS Concerning damage to a covered automobile, the policy provided as follows under the heading “Limit of Liability”:
Our Limit of Liability for loss will be the lesser of the:
1. Actual cash value of the … damaged property;
2. Amount necessary to repair or replace the property with other of like kind and quality; or 3. Amount stated in the Declarations of this policy.
In its first point of error, the Company complains the trial court erred in concluding as a matter of law that the phrase ‘like kind and quality’ does not allow an insurer to deduct for betterment or depreciation.
In arriving at the correct measure of damages in an action to recover under an automobile collision policy, it must be kept in mind that the action is not a suit for damages but one on the contract of insurance, and that therefore the language of the contract sued upon must prevail.
The contract provision quoted above gave the Company an election. The Company might pay Lewis (1) the actual cash value of the damaged property or (2) the amount necessary to repair or replace the property with another of like kind and quality. After inspecting the engine, the Company elected to pay the “amount necessary to repair or replace the property with other of like kind and quality.” The parties agreed that the engine required repairs totaling $3,608.27 and that the Dodge Caravan had been driven 110,000 miles when the engine–original to the car–was damaged.
The words betterment and depreciation are not found in the policy. The Company argued, however, that they are necessarily implied because the replacement engine costing $3,608.27 is tantamount to a new engine–it will carry a warranty even though it is re-manufactured. Thus, the rebuilt engine will have an expected useful life much longer than Lewis’s used engine that had been driven 110,000 miles when it was damaged. Calculating that the 110,000 miles were equivalent to three-quarters of the useful life of the damaged engine, the Company argued that Lewis will receive an equivalent windfall unless the Company is allowed its claimed entitlement to a deduction for betterment or depreciation.
It is generally accepted that depreciation is a factor to be considered when an insurer elects to pay the “actual cash value” of the damaged property, which the Company declined to do here. By electing to pay Lewis the “amount necessary to repair or replace” the engine with another “of like kind and quality,” the Company elected a measure of loss that does not allow for depreciation.
The words “repair” and “replace” mean restoration to a condition substantially the same as that existing before the damage was sustained. Because Lewis’s automobile was a functioning or operating automobile before the damage, the Company was required to pay an amount necessary for a repaired or replacement automobile of that character. The qualifying words “of like kind and quality” permit but do not require an engine of similar age, use, condition, or present cash value; they refer simply to repairing the damaged automobile so that it is suitable or fit for its intended purpose.
When an insurer elects to repair, the insured is entitled to the amount required to repair the automobile. The insurer’s obligation in such a case is not discharged until the insurer pays the cost of repair less any deductible specified in the policy. The only evidence in the record regarding the cost of repairing Lewis’s automobile is the agreed sum of $3,608.27; the specified deductible is $527.00.
If the Company may discharge its obligation by paying Lewis $1,049.55, he will not have, under the evidence, a sum sufficient to restore his engine and automobile to a functioning or operating state. He will be deprived of the protection ostensibly purchased in his policy–protection against the risk of having to pay out of his own pocket to restore his motor car and its component parts to a functioning or operating state in the event they were damaged.
By reducing its payment to Lewis by “betterment” or “depreciation,” the Company failed to provide Lewis with an amount of money sufficient to make his vehicle as serviceable as it was before the loss.
Thus, the Court sustained the trial court ruling in favor of Lewis.
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