Insurance policies are confusing to most homeowners, full of complicated terms, coverages, and limitations. One of the most confusing distinctions for homeowners is the difference between Actual Cash Value (ACV) policies and Replacement Cost policies. Here, we’ll go over what these terms mean and what makes these two types of insurance policies different.
Please also check out our other stories on Understanding Your Insurance Policy.
But first, what is Depreciation?
Depreciation is essentially the current “market value” of the item or material taking into consideration condition and life expectancy. Essentially, the value after depreciation reflects what that item or material is worth now rather than what it was worth new or when it was originally installed.
Take for example a roof with a life expectancy of 30 years. Should you suffer storm damage to your roof 15 years after it was originally installed, this roof repair / replacement could be depreciated at 50%.
What is Actual Cash Value (ACV)?
With an Actual Cash Value policy, your insurance company owes you for the “market value” or “actual cash value” of the item or repairs and nothing more. Should the cost of materials and repairs exceed this “market value” settlement, these additional costs are your responsibility. This additional cost can represent a significant out of pocket expense and can significantly delay the commencement of repairs.
Let’s take for example the same roof with a 30 year life expectancy. Let’s consider that the estimated cost of repairs is $ 10,000, however because the roof is halfway through its expected life, this work is depreciated at 50%. This means that the insurance company will compensate the insured $ 5,000 towards this necessary work, while the insured will be responsible for the remainder.
What is Replacement Cost?
Replacement Cost refers to the amount it would cost to replace the item or material now. This will reflect the current cost of the material and current labor costs expected as part of the repair. In cases where the item or material is no longer available, this type of policy covers the replacement cost of a suitable replacement.
Payments on Replacement Cost policies are often handled in two parts. The first payment will reflect the Actual Cash Value (ACV) of the repair after depreciation. Once the repair has been completed and the insured has provided the insurance company adjuster with documentation supporting this, a second payment is issued for the additional or “recoverable depreciation”. There may be a deadline in place for recovering the depreciation, so be certain to confirm with your insurance adjuster that this work will be completed within any such requirements.
What is recommended?
While “market value” plays a role in all insurance claims, Replacement Cost policies are far more beneficial to homeowners than Actual Cash Value (ACV) policies. The difference essentially boils down to who pays for the depreciation, in the case of an Actual Cash Value policy you are responsible for this additional expense, while with a Replacement Cost policy your insurance company is ultimately responsible.
When you suffer an insurance claim, you are looking to be made whole and for the damages to be repaired fully. You likely are not expecting to be made partially whole or ultimately be responsible for potentially thousands of dollars in out of pocket expense.
While Actual Cash Value policies are generally cheaper than Replacement Cost policies, the difference in coverage and the protections these policies provide is significant.
Do I Need An Insurance Agent?
Due to the complexities of insurance policies and the various coverages available, we strongly recommend contacting a Local Insurance Agent that is able to make recommendations about coverages you should have and ensure that you are adequately covered in the event of a claim.
Most insureds find out that they are inadequately insured when they suffer a claim and need their insurance. Don’t wait until you need it to find out what coverages you have, have a local insurance agent review your coverages and your needs before you need it.
We hope you found this information helpful! Should you suffer a property claim and have a need for any of our services, please do not hesitate to contact your local Disaster Blaster offices, we’re always happy to assist!
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