Third-Party Property Damage: ACV or Replacement Cost?

A driver crashes his vehicle into an insured’s home. The driver’s auto insurer informs the homeowner and their agent that they will pay the claim for the damage to the home on an actual cash value basis, then advises the homeowner to submit the claim to their homeowners insurer.

Q: Since it was the other party who caused the damage, isn’t it his responsibility to pay to restore the dwelling to its original condition?

Response 1: It depends on state law. In many states, the auto insurer owes ACV only, because it meets the state’s definition of “indemnified.”

Response 2: Property damage on an auto claim is ACV. Submit the claim and allow the homeowners carrier to subrogate against the driver’s auto carrier.

Response 3: The driver’s carrier is correct. A third party only owes what the property damage cost—not what it costs to improve the property. That is why we sell replacement cost on a homeowners policy—or any other property policy. Your client’s carrier will pay replacement cost and subrogate against the third party. In doing so, they will recover your client’s deductible as well.

Response 4: The homeowners policy will pay full replacement cost, new for old, which is better than ACV.

Response 5: The homeowners carrier will subrogate against the auto carrier. Submit the claim, get the repairs and let the carriers deal with the differences.

Response 6: State law determines how property damage liability claims are settled. “ACV vs. RC Recovery in Liability Claims,” an article from the Big “I” Virtual University, explains the difference in further detail.

Response 7: The driver's insurance company is giving you good advice. Your best approach is to file the claim under the homeowners policy, which is in all likelihood written on a replacement cost basis. Then, let the homeowners insurer subrogate against the at-fault driver's auto insurer. When the at-fault driver's insurer reimburses the homeowners insurer, your client will get their deductible back.  

Response 8: For the cost of the damages to make your insured whole—in other words, to indemnify them—actual cash value, as long as it is appropriately measured, is usually the best measure because it puts your insured back into the same position as before. Replacement cost, on the other hand, confers improvement.

As adjustments of damages are usually negotiated—or, if at trial, determined by a jury—a liability insurer may at times pay the cost to repair with new property of like kind and quality for the sake of simplicity, but is usually not obligated to do so.

Response 9: Property damage liability pays on an ACV basis. The defining principle of indemnity is to put the person back in the same position as they were prior to the loss. Replacement cost does not indemnify—it is betterment.

This question was originally submitted by an agent through the VU’s Ask an Expert Service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.