Washington Supreme Court: Actual Cash Value Includes Sales Tax

The Washington Supreme Court has ruled that an insurer is required to pay sales tax when reimbursing a client for the actual cash value (ACV) of damaged property.

According to court documents in Laura Holden v. Farmers Insurance Co. of Washington, Holden purchased a renter’s insurance policy from Farmers that provided coverage for ACV of damaged property due to fire. ACV was defined as fair market value in the policy. She also had purchased a contents replacement cost coverage endorsement, requiring her to replace or repair damaged items within 180 days after the loss, with the insurer replacing out-of-pocket costs after the insured submits receipts for reimbursement.

After a fire destroyed some of her personal property, she sought coverage, but Farmers refused to acount for Washington State sales tax when calculating the value of the damaged property.

During discovery, Farmers disclosed that it used a variety of methods to calculate FMV under ACV, including surveying online markets, hiring an appraiser and using a replacement-cost-less-depreciation formula. The insurer said when it used the replacement cost less depreciation to calculate FMV, replacement cost sometimes includes sales tax. And because Farmers used more than one method to interpret FMV, the trial court ruled that the ambiguity should be construed in favor of the insured, with sales tax as part of the FMV.

“Regardless of whether the insured replaces the lost or damaged property, she paid the sales tax when buying it originally,” the Supreme Court wrote. “Furthermore, taking sales tax into account does not result in her reaping a windfall. … Rather, the sales tax is simply included in calculating the replacement cost of the damaged property before subtracting for depreciation, which is one way to estimate the property’s current value.”

Furthermore, the high court said that because Farmer’s ACV provision is “ambiguous,” it should be read in favor of the insured to include the consideration of sales tax when calculating the FMV of damaged property.