Actual Cash Value and Fair Market Value
I’ll bet that no one has explained to you what I am about to explain . . .First of all, the terms Actual Cash Value (ACV) and/or Fair Market Value (FMV) are sorely lacking and ambiguous when it comes to actually helping to define the value of a private passenger automobile. In fact, the formal definition in almost every source one can find leaves out the MAIN ASPECT that would make the definition useful. The terms ACV and FMV are so ambiguous that they are totally meaningless when it comes to figuring out the value of your vehicle. Don’t believe me, let’s break it down. Start with familiarizing yourself with the “formal” definitions.
Below are three definitions for each term from well known and frequently cited sources:
ACTUAL CASH VALUE DEFINED
1. Actual Cash Value: The fair or reasonable cash price for which property could be sold in the market, in the ordinary course of business, and not at forced sale; the price it will bring in fair market after reasonable efforts to find a purchaser who will give the highest price. What is ACTUAL CASH VALUE? definition of ACTUAL CASH VALUE (Black’s Law Dictionary). (2011). The Law Dictionary. Retrieved 12 October 2017, from http://thelawdictionary.org/actual-cash-value/
2. Actual Cash Value: In property and auto physical damage insurance, one of several possible methods of establishng the value of insured property to determine the amount the insurere will pay in the event of laoss. ACV is typically calculated one of three ways; (1) the cost to repair or replace the damaged property, minus depreciation; (2) the damaged propertys’ “fair market value”; or (3) using the “broad evidence rule.” which calls for considering all relevant evidence of the value of the damaged property. actual cash value (ACV) – Insurance Glossary | IRMI.com . (2017). Irmi.com. Retrieved 12 October 2017, from https://www.irmi.com/online/insurance-glossary/terms/a/actual-cash-value-acv.aspx
3. Actual Cash Value: In the property and casualty insurance industry, Actual Cash Value (ACV) is a method of valuing insured property, or the value computed by that method. Actual Cash Value (ACV) is not equal to replacement cost value (RCV). ACV is computed by subtracting the depreciation from replacement cost. The depreciation is usually calculated by establishing a useful life of the item determining what percentage of that life remains. This percentage multiplied by the replacement cost equals the ACV. “Actual Cash Value.” En.wikipedia.org. N. p., 2017. Web. 12 Oct. 2017.
FAIR MARKET VALUE DEFINED
1. Fair Market Value: The price a buyer will pay. All parties are willing and aware of the property and its value. What is FAIR MARKET VALUE (FMV)? definition of FAIR MARKET VALUE (FMV) (Black’s Law Dictionary). (2012). The Law Dictionary. Retrieved 12 October 2017, from http://thelawdictionary.org/fair-market-value-fmv/
2. Fair Market Value: FMV is an estimate of the market value of a property, based on what a knwledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. “Fair Market Value.” En.wikipedia.org. N. p., 2017. Web. 12 Oct. 2017.
3. Fair Market Value: Probable price at which a willing buyer will buy from a willing seller when (1) both are unrelated, (2) know the relevant facts, (3) neither is under any compulsion to buy or sell, and (4) all rights and benefit inherent in (or attributable to) the item must have been included in the transfer. FMV is generally the basis for tax assessment and court awards. “What Is Fair Market Value (FMV)? Definition And Meaning.” BusinessDictionary.com. N. p., 2017. Web. 12 Oct. 2017.
ACV AND FMV – DEFINED OR NOT?
So, you might be saying, what is so ambiguous about the definitions? When you read through them, they sound formal and clear enough, right? Wrong!
Think about it. . .
EACH AND EVERY formal definition is missing a clarification of which MARKET!
Go back and look. They don’t tell us WHICH market or even say that a market definition is required. Now. . . Is it not true that I can sell my vehicle to a willing buyer off of Craigslist (private party market), or that I can also sell my vehicle to a willing buyer who is a dealer (trade-in market)? If I am a dealer can I not sell my vehicle to another willing dealer (wholesale market), or could I sell my vehicle to a willing consumer that comes to my sales lot (retail market)? I’ve just listed four different markets for an automobile! They will all have different values even for the exact same vehicle!
In fact, there is NO WAY to determine an accurate FMV or ACV without some further clarification of the market and type of value. Unfortunately, claims managers and supervisors, insurance adjusters, and damage estimators (who are told by their employers that they are also qualified appraisers) have very little experience with the legal requirements for formal appraisals that prove value. Insurance company employees follow a set of instructions from their boss, or they get fired. Although they could, insurance carriers (except the few good ones) refuse to train their staff. Sadly, instead of hiring an expert to train their staff, most insurance companies simply tell their claims people to “use this method” and drive home that the method they are trained to use will give them a fair ACV or FMV. Even more sad, very few adjusters will question authority (it’s in the nature of the job to follow instruction or get fired), so they simply regurgitate the false information they are trained to provide when any vehicle owner disputes the validity of their ACV or FMV figures.
Have you heard “That’s not how it works, sir/ma’am”?
Mind you, these same adjusters NEVER use an FMV or ACV that properly defines the market and type of value that they allegedly compute. It’s corporate brainwashing / institutionalizing at its best. The insurance carrier adjuster is afraid to ask. . . Fair WHAT MARKET Value? Or Actual cash value in WHAT MARKET? They won’t rock the boat because they might lose their job. It’s much easier to just do what the boss says and not worry about the “right” thing to do.
Even worse, in the RARE instance that an insurance company has defined a market and value it is invariably the WRONG one! For total loss claims, carriers like to imply that the right market to measure is the private party market. This results in LOWER payouts than if they used the proper market (retail). In the same way, carriers like to imply that the right market to measure for a diminished value claim is the retail market. Again, this results in a LOWER payout than the appropriate market (trade-in).
When I started Petty Details, LLC, I had already spent years researching how to properly perform an appraisal of value. What I found out is that there are very few reliable experts and only a handful of cases and data that is reliable regarding appraisal standards. With the help of numerous attorneys, I’ve thoroughly researched what is required if one wishes to prove vehicle value in a court of law. I found that each State has similar rules and that if an appraiser is going to go to court and testify, then they can be challenged under various different standards (a whole other article). Simply put, any appraiser that writes an appraisal (if they want it to hold water in court) needs to make sure they can pass the Daubert or Frye standard (or their equivalent) and that they conducted their appraisal appropriately.
Courts want to see that there is a sound method for arriving at expert opinions of value. The method I found which was the MOST PREVELANT in the US is called the USPAP or Uniform Standards of Professional Appraisal Practice. The IRS and most professional appraisers will require that written appraisals be developed and produced in the manner prescribed by the USPAP guide. I got a copy of the guide and painstakingly went through it. It is very good and thorough. It addresses almost every problem that an appraiser might face when attempting to place a value on property (of any type). It has standards for real property (like houses) and personal property (like an automobile) and all other types of property (antiques, profit, etc.). Insurance companies will refuse to acknowledge these formal standards. I think it is because it helps them to make offers that are not in line with the values in the appropriate market.
If they used the standard then one of the first rules is that the appraiser must DEFINE THE MARKET!
Here is the quote right out of the USPAP Standard 7 (for personal property):
“(b) define and analyze the appropriate market consistent with the type and definition of value: and
COMMENT: The appraiser must recognize that there are distinct levels of trade (measurable marketplaces) and each may generate its own data. For example, a property may have a different value at a wholesale level of trade, retail level of trade, or under various auction conditions. Therefore, the appraiser must analyze the subject property within the correct market context.”
As you can see, when a formal standard for appraising value is used, then there is a requirement to DEFINE what MARKET is being measured AND to define the value (ACV or FMV). The lack of a defined market why the reliance on simply saying they used the ACV and FMV is lacking, and in my opinion VERY misleading.
To summarize, it’s unfortunate that the lack of formal appraising knowledge is especially evident in automobile value disputes. Because of the relatively low values that typically involved, carriers bully victims and customers. For a dispute that is under $10000, it is exceedingly difficult to get competent help, and carriers know this.
They ignore you or simply tell you “that’s how it is ma’am/ sir,” and hope you give up.
I like proving that difficult / impossible things are only difficult or impossible until somebody makes them easy or possible. I don’t have any quit in me. If you have a dispute about the value of your vehicle, get the facts. Don’t you dare believe that an insurance company is following appraisal rules when determining the ACV / FMV. I assure you they are following INSURANCE rules, not appraising rules. Get an expert like me to confirm whether they’re properly valuing your property. If you’re an insurance company, get a qualified expert to help you do the right thing or the victim might find me and the team at Petty Details, LLC!