Washington Supreme Court Requires Property Insurer To Pay Sales Tax For Actual Cash Value Claim
On September 9, 2010, the Washington Supreme Court ruled in favor of a plaintiff class and against Farmers Insurance (.pdf) with regard to whether the Actual Cash Value (ACV) provision in Farmers Insurance's renter's polices requires payment of sales tax. The ACV provision states that a "[c]overed loss to property will be settled at actual cash value," and defines ACV as "the fair market value of the time of loss." Farmers had refused to pay sales tax to the class representative and appears to have relied largely on the fact that her policy also included a Contents Cost Replacement Coverage endorsement which provides for reimbursement to the insured if they replace items within 180 days of loss. Farmers took the position that the class representative was entitled to sales tax if she actually spent the money to replace items and incurred sales tax but not if she instead chose to take payment under the ACV provision. The Supreme Court rejected Farmer's position, finding that the undefined term "fair market value" was ambiguous and that it was reasonable to include sales tax within the meaning of the term.
Of particular significance for all insurers, the Court's decision turned largely upon the fact that Farmers had disclosed during discovery that it uses multiple ACV methods to measure including a replacement-cost-less-depreciation formula which sometimes includes sales tax. In responding to Farmer's arguments, the Court stated that "[fair market value's] meaning in the context of this insurance contract is what matters, which is why Farmer's own practice of including sales tax is critical. The Court's decision confirms that both insurers and insureds should carefully examine an insurer's own practices when determining the proper meaning of an insurance contract.
