Two Very Different Ways to Pay a Claim
When you file a home insurance claim, the amount your insurance company pays you depends on whether your policy uses actual cash value or replacement cost value as the basis for calculating your settlement. These two approaches can result in dramatically different settlement amounts for the same loss, and most homeowners do not know which one they have until they file a claim.
Actual Cash Value
Actual cash value, often abbreviated as ACV, pays you what your damaged or destroyed property was worth at the time of the loss after accounting for depreciation. Age, wear and tear, and condition are all factored into reducing the payout from what a replacement would cost.
Here is an example. Your roof is 12 years old and suffers significant hail damage. A new roof costs $18,000. Under an ACV policy, the insurance company will depreciate the roof based on its age and condition. If they determine the roof has depreciated by 50 percent over 12 years, your settlement before your deductible might be $9,000. You pay the deductible plus the $9,000 gap between the ACV settlement and what the new roof actually costs.
Replacement Cost Value
Replacement cost value, often abbreviated as RCV, pays the actual cost to repair or replace the damaged property with materials of similar kind and quality, without deducting for depreciation. Using the same example, a replacement cost policy would pay $18,000 minus your deductible toward the new roof, regardless of how old the original roof was.
The difference between ACV and RCV on a roof claim alone can easily be $5,000 to $15,000 or more depending on the size of the roof and its age.
Which One Do You Have
Check your policy declarations page and look for language describing how dwelling coverage and personal property coverage are calculated. Look for the terms replacement cost or actual cash value. If you are not sure what your policy uses, call us and we will look it up for you.
Be aware that your dwelling coverage and your personal property coverage may use different methods. Some policies pay replacement cost for the dwelling structure but actual cash value for personal property. Read both sections carefully.
The Impact on Personal Property Claims
The ACV versus RCV distinction applies to personal property claims as well as structural claims. If your television is five years old and stolen, an ACV policy pays what a five-year-old television of similar specifications is worth today, which may be a fraction of what a new replacement television costs. An RCV policy pays what a comparable new television costs today.
The Cost Difference in Premiums
Replacement cost coverage costs more than actual cash value coverage because it pays more at claim time. The premium difference varies but in Texas the additional cost for RCV coverage is typically worth it given the frequency of hail and storm damage claims. We can show you the premium comparison for both options on your specific home.
Our Recommendation for Texas Homeowners
For virtually all Texas homeowners, we recommend replacement cost coverage for both the dwelling and personal property. The additional premium cost is modest compared to the potential difference in claim settlement, particularly for roof claims which are extremely common in North Texas.
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