If you’ve filed a claim and received an estimate for repairs from your adjuster or your contractor, chances are the terms Actual Cost Value or Replacement Cost Value or their corresponding acronyms (ACV or RCV), appear somewhere on that estimate. These are terms that may be unfamiliar to someone who is new to the insurance claims process, but it is important to know the difference between them and what they represent as far as what your insurance policy covers.
In many instances homeowners do not have a clear understanding of what their insurance policy covers. Your policy doesn’t typically make for great summertime reading and can often times be a bit complicated to understand. One thing all homeowners and policy holders should know is whether your policy offers Actual Cost Value coverage, or Replacement Cost Value coverage. Every home insurance policy is different, but the majority of homeowner policies in the state of Texas offer Replacement Cost coverage. So what does this mean for you the homeowner? Let’s start with some definitions.
What is Replacement Cost Value?
For Example: Your home was damaged by flooding due to a broken pipe inside your home. You filed a claim with your insurance company, have met your deductible, and are looking to replace the furnishings that were damaged as a result of the water. One of the furnishings that was damaged was a sofa that you had purchased about a year ago for $1500. If you have Replacement Cost coverage as part of your policy, you might be paid $1500 to $1600 for the sofa because that is what it would cost to buy a similar sofa at today’s market prices.
ACV is the Replacement Cost less depreciation.
For Example: If we were to use the scenario described above with the sofa, and your policy provided Actual Cost Value coverage, you may get paid $1200 for the sofa as opposed to the $1500 that you paid for it when you purchased it. This is because with Actual Cost Value coverage your carrier is paying for the Actual Cost of that sofa today (think one year old used sofa).
So what is this “Depreciation” that keeps getting mentioned?
Depreciation is the loss of value of property due to age, wear and tear, or obsolescence.
Depreciation can be defined as the decrease in the value of property over time due to wear and tear, age, or in some cases economic obsolescence. A simple way to think about this is how much you would be willing to pay for a new television as opposed to what you would be willing to pay for a used television. The difference between those amounts can be thought of as a type of “depreciation” you have associated with the used TV. Insurance companies obviously use more sophisticated methods to determine a depreciation amount. They attempt to establish the useful lifespan of an item (for example a TV’s useful lifespan may be determined as 10 years) and then determine how much of that lifespan remains as a percentage. You multiply that percentage by the replacement cost and you get the Actual Cost Value or ACV.
For Example - A TV you bought 5 years ago for $1000 is damaged or destroyed due to a fire. The useful lifespan of a TV is determined to be 10 years. The cost to replace the TV with a brand new one (Replacement Cost Value) of like kind and quality today is $1300. But, because the TV that was damaged was already 5 years old, it only had 5 years left of its useful lifespan. So the current Replacement Cost for the damaged TV is $1300 with 5 years of useful life left (50%), the Actual Cost Value would be calculated as $650 ($1300 (RCV) x 50% (Percent of useful life left) = $650 (ACV)).
While the example of the television can be helpful in conceptualizing depreciation, it is important to keep in mind that depreciation can apply to the building materials inside your home as well. The difference between dollar amounts covered under Replacement Cost and Actual cost can vary quite significantly, so it is therefore important to know which one your policy includes and make sure that you are comfortable with the amount of coverage you have. As you might imagine, each type of coverage affects your premiums. Replacement Cost coverage is more expensive, as you are replacing old with new. You should speak with your adjuster to clarify which coverage is included in your policy before you begin any repair work.
Hopefully this helps you understand some of the terminology that might show up on your policy, or might be thrown around if you have filed a claim. Feel free to leave any questions in the comments section if you would like clarification. Understanding your policy and the claims process is a vital step in alleviating stress during the repair process.
Note: All examples mentioned above were created to help explain these concepts and do not represent actual values determined by any other entity. If you have questions about a claim that you filed, or about the coverage of your insurance policy it is always advisable that you speak with your Agent or Adjuster.
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