Understanding Insurance, Replacement Cost vs Actual Cost Value
As if understanding homeowners insurance wasn’t hard enough, you also have to know the difference between actual cash value (ACV) and replacement cost value (RCV). However, it is imperative that you know these terms and their differences because it could mean the difference between a little money and a lot of money at claim time.
What is Actual Cash Value or ACV?
The phrase “actual cash value” is not easily defined. Some courts have explained it as “fair market value.” However, the majority of courts have supported the insurance industry’s conventional definition: the cost to replace with new property of like kind and quality, minus depreciation.
What is Replacement Cost Value or RCV?
The phrase “replacement cost value” is stated or defined in the policy as the cost to replace the damaged property with the same like kind and quality without deducting depreciation. The purpose of replacement cost is to repair or replace the item in today’s market conditions to make the insured whole again.
Depreciation is the loss of value from all causes such as age, wear and tear, and deterioration.
How ACV, Depreciation, and RCV Work in Regards to Your Insurance
You may find the following wording on many insurance policies.
“We will pay the cost to repair or replace with similar construction and for the same use on the premises, subject to the following: until actual repair or replacement is complete, we will pay only the actual cash value at the time of the loss of the damaged property.”
So, for example, let’s say your current homeowners is a replacement cost policy. One day you are sitting in your living room, and you hear a loud thud. You walk outside to find a tree has fallen over on your roof and causes significant damage. You estimate that your roof is ten years old. Per your policy, the insurance company is entitled to pay for the destroyed roof and make you “whole” again. When adjusting the claim, the age of your roof will be taken into consideration, and give you an initial check for the actual cash value amount of the roof. Once you have replaced the roof by a licensed contractor, your insurance company will issue you another check for the depreciation amount they held back initially. The total of the two checks will allow you to collect the full replacement cost value of your damaged roof.
Think of it like this, Actual Cash Value = Replacement Cost – Depreciation.
How to Figure Out the Replacement Cost of Your Home
Here are six easy to follow steps for to calculate your home’s replacement cost.
- Do your math. Start by studying what home builders in your area charge per square foot. Then multiply your home’s square footage by the normal rate, this will give a good idea of the replacement cost of your house.
- Estimate how much your home’s floors are worth. Start by looking at the pricing of your flooring type (carpet, hardwood, tile, etc.) at local stores. You will also need to know what it costs per square foot for installation. So if your hardwood floors cost an average of $5 per square foot, and you have a 2,000 square foot house, your floor’s value would be $10,000.
- Account for the details. Look around your kitchen and bathroom. Do you have custom cabinetry, fixtures, and upgraded appliances? Look at your local store for the price if you had to purchase new same-quality ones.
- Figure the value of your home’s exterior finish. Determine the value of your house’s exterior finish from siding to windows. Remember, the cost can differ greatly based on the type of exterior siding you have, for example, vinyl may be less expensive than stonework. Plus the quality and type of your windows, basic-grade vinyl windows don’t cost as much as more custom windows such as arched, box-style, garden, or windows with inlays.
- Call a roofer for an estimate on your roof’s replacement cost. Contact a local roofer for details on your roof’s replacement value. The complexity of your roof’s truss system will determine the replacement cost as installment costs tend to differ greatly. If you multiply the surface area of your roof by the replacement value of the roofing material, you can get an idea of the replacement cost as well.
- Maintain good records. You should always maintain a home inventory of your belongings, but keeping all receipts and records regarding repairs, upgrades, and general changes you’ve made to your house is also wise. It is a good idea to make a video documenting your home’s interior and exterior elements. This means all appliances, flooring, utilities, ceiling materials, HVAC system, electrical panel, hot water tank, exterior siding, roof materials, and attached structures like your garage, deck, and breezeway.
Once you have the video, make sure to backup a copy of the video (on an external hard drive, for example) and any time you make changes to your house update the video. This could help you recall the exact conditions of your property if it is ever taken out by fire or a storm.
Should I Purchase an ACV or RCV Homeowners Policy?
Now, that you know how actual cash value and replacement cost values work on a homeowners policy, you are probably wondering which is the best option for you. And there are a couple of things to consider before making a decision.
First, let’s talk the difference in payouts if your home has a replacement cost value of $245,000, but you decided to go with a less expensive policy and chose ACV at $187,000 that is a significant difference in the amount the insurance company is going to payout. Because here is the thing, the cost to rebuild your home doesn’t change because of the type of policy you chose. It is still going to be $245,000 to rebuild your home, and you are only getting $187,000 from the insurance company. So do you want to come up with $58,000 out of pocket to save a few bucks in the beginning? Probably not. If you are worried about the price difference, you can always raise your deductibles, bundle your home and auto together for a discount or look into other discounts carrier’s may offer.
Another thing to keep in mind is that if you have a lender on the home, they typically require insurance and want a replacement cost policy. So you have no choice there.
Okay, so let’s say you have a rental property and it is a little older and needs some work. Maybe it’s not worth the replacement cost policy, and if something happens to it, you probably won’t want to rebuild. In that case, it is probably fine to carry an actual cash value policy on it. In fact, some insurance companies may only insure it on an ACV basis if it is older and not in the best condition.
If you are not sure what to do, give us a call. We will be happy to walk you through the different scenarios and costs to find the right product that fits your needs.