“Actual Cash Value” of Unreplaced Property Does Not Include Sales Tax

Holden v. Farmers Ins. Co. (Div. I, Jan. 22, 2008)

The court of appeals held that coverage in a renter's policy for the “actual cash value” of a property loss indemnifies the insured against actual loss and thus does not cover sales tax unless the insured actually replaces the property, incurring the sales tax.

Laura Holden’s renter's policy included property loss coverage based on “actual cash value” as well as coverage for replacement cost. The policy defined “actual cash value” as the “fair market value of the property at the time of the loss.”

Holden filed a claim under the actual cash value provision for property destroyed in a fire, but did not replace the property. Farmers paid the fair market value not including sales tax. When Holden requested inclusion of sales tax, Farmers responded that she could claim the replacement cost, including sales tax, if she submitted a receipt reflecting the cost of replacement. Holden sued Farmers.

The trial court ruled that Farmers’ definition of actual cash value was ambiguous because Farmers does pay sales tax under the actual cash value coverage provision if the insured replaces the property and the policy does not include separate replacement cost coverage. The court construed the policy against Farmers as the drafter and entered summary judgment for Holden.

The court of appeals reversed. The court held that because actual cash value coverage indemnifies the insured for the actual loss sustained, sales tax is covered only if incurred by the insured. The court held that Farmers’ payment of sales tax under the actual cash value coverage in some circumstances did not render the clause ambiguous but was “a consistent application of the principles of indemnification.”

Update:  This decision was REVERSED by the Washington Supreme Court