Presented byMark Roberton – NexenTom O’Leary – FMC Norma Reimer – Trek

Don’t be Surprised by Actual Cash Value (“ACV”)

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Some ACV Background

Historical form of Insurance Strict Indemnification Alternative Covers today

– RCV– Guaranteed Replacement Cost– Stated/Agreed Value forms

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Why Is ACV Relevant Today?

Remains in virtually all policies as a Settlement Option When is it a settlement option?

– When Insured chooses– When repair/replacement hasn’t begun in timely matter

Bottom Line…

Risk Managers Need To Be Well-Familiar with ACV & when it should be used as an option!

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Risk Management Issues

Focus on the Cover in current policies– Fit with Actual Asset Replacement Plans?

Replace v. Don’t Replace v. Replace with Something Else

– Talk to your Business Units!!– What should you actually insure?– Communicate clearly internally and with insurers

● Can Cover Be Amended?

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Where Might ACV Be Used?

Can’t complete repairs on timely basis

Would prefer the Cash – rather than repair/replace

Company is Cash constrained (e.g. exhaust insurance available)

Can’t or Don’t want to meet Specific RC requirements

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ACTUAL CASH VALUE (ACV)You may need to know…

Disclaimer Not an ACV Expert Not representing Clients (past or future) Not representing my firm Maybe not even representing me (in the future) Any Resemblance to Real Life Is Purely Accidental!

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Practically Thinking about ACV (Non-lawyer viewpoint)

Does Actual Cash Value Define Itself?

If ACV = Market Value Approach V. Fair Market Value

V. Value to Owner V. How much would you Pay?

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Practically Thinking about ACV (Non-lawyer viewpoint)

Market Value usually = Fair Market Value FMV is “Highest price available in an open market,

between prudent parties both willing to transact, in terms of cash, at a point in time”

What about Value to Owner Considerations??“Refers to all economic (and non-economic) benefits that accrue from ownership” – e.g. Owner may generate higher benefits due to personal contacts, etc.

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Practically Thinking about ACV (Non-lawyer viewpoint)

ACV = Replacement Value Less Depreciation?(but if it’s a partial loss maybe no depreciation – question is would the repair leave you better off?)

Incidentally, What Is Depreciation?

Is Depreciation the Flip side of Betterment? Maybe…

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Practically Thinking about ACV (Non-lawyer viewpoint)

Per Tom, “Depreciation” Is: Physical Depreciation (probably for sure) Sometimes “Depreciation” is broader and also

includes:– Obsolescence – e.g. Functional (including technological) and

Economic Obsolescence Sometimes Depreciation is spelled out

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Actual Cash Value v. Replacement Value – An Illustration

Replacement <Replacementof the Old > with New = (ACV) = (RC)

Actual Cash Value v. Replacement Value – An Illustration

Replacement Replacementof the old = (ACV) with new = (RC)

Going Through ACV Quantification

Say you are going with this guideline:

ACV = Replacement Cost Less ● Depreciation

● Functional, ● Technical, & ● Economic Obsolescence

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Quantifying Replacement Value

Lesser of:– Replacement Cost– Repair with Materials of Like Kind & Quality

May need outside assistance unless you recently built a similar asset– Favourite/Likely Contractor or Engineering Firm– Not Free

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Quantifying Replacement Value

Don’t forget the Soft Costs like…– Engineering and Project Management

(outside)– Head office costs of project management

Engineering ● SupervisionInspections ● QA/QCSafety ● Builder’s Insurance

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What Depreciation Isn’t…

Accounting Depreciation

– Or -

Tax Depreciation!

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What Depreciation Is – or – May Be…

We can probably safely say Depreciation includes Physical Depreciation

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Illustrations…

Physical Depreciation

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Quantifying Physical Depreciation

Assuming you have a total loss… Consider the Whole Consider the Parts

– are you really better off with physically new? Remember Not Accounting or Tax May need some outside assistance here – asset

or equipment appraisers

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What Depreciation Is – or – May Be…

Depreciation May (but not necessarily) also include…

– ObsolescenceTechnicalFunctional Economic

What the heck are these things?

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Illustrations…

TechnicalObsolescence

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Quantifying Technical Obsolescence

Consider Efficiency – better with old or new? Technological change does not mean

technological obsolescence Consult your own Operators Is there Negative Technical Obsolescence?

– New replacement requires other upgrades?– Old equipment was grandfathered

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Illustrations…

FunctionalObsolescence

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Quantifying Functional Obsolescence

Can be thought of as Capacity and Capability Function or Capacity Not Being Used Or – No longer works Some Defensive Arguments:

– Long term v. Current – Demand goes up and down– Frequent v. Infrequent – Still needed sometimes– Function was still valuable to potential buyer

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Functional Obsolescence Cont’d

For Help on Functional…

– Start with the Operators (immediate use)

– Go to the Higher Level/Strategic managers (longer term view & value to others)

– Potentially go to appraisers

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Illustrations…

$$$ Economic Obsolescence $$$ Earnings?

Fashion?

Keeping-Up?

Economic Obsolescence

More Externally-Driven Declines in Value -- Probably the most unclear…

Does your asset make you money? Would your asset make someone else more

money? Will your asset make more money than its

replacement cost over time?

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Economic Obsolescence cont’d

Issues to Consider– Long term v. Short term outlook– Foregone long term opportunity– Cash flow sensitivities

Who can Help?– Your company’s economic/strategic planners– CBV’s with insurance background

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Conclusions

Keeping alive the option to replace can be helpful

Just being aware of the issues in adjusting ACV is half the battle!

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ACTUAL CASH VALUE (ACV)Is recovery the same in these scenarios?

Actual Cash Value Coverage

Replace with new

Walk away

Replacement Cost Coverage

Replace but not within provisions

Walk away

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