Not paying attention to property values until there’s a homeowner claim, then assuming that their coverage limits are ENOUGH is a fairly common practice for many homeowners. Many insured’s count on the fact that their home is insured, as the same as their home being insured properly. Enter ACV versus RC…
Homeowner insurance coverage is either valued on a Replacement Cost (RC) basis or an Actual Cash Value (ACV) basis. Replacement cost is defined as the cost to replace the property based on today’s prices, with materials of like kind and quality. Actual cash value is the replacement cost minus actual physical depreciation.
- For example, when “Actual Cash Value” is the method used to value property, the insured is entitled to receive compensation to repair the property minus a deduction for depreciation, or the fair market value if the dwelling is completely destroyed.
- When “Replacement Cost” is the method used to value property, the insured will be compensated the amount necessary to replace the damaged property with something of like kind and quality at today’s prices. A typical homeowners policy offers replacement cost on the home, but payment is limited up to the maximum coverage amount listed on the policy declarations page.
Some homeowner insurance policies have what is called Extended Replacement Cost. This will pay for the replacement of the home even if it exceeds the coverage limits. There is no deduction for depreciation. Extended replacement cost allows for additional coverage above the dwelling limits up to a certain percentage of what the insurer will pay on a claim. We recommend this level of coverage.
SO what does this all mean?
The longer you own your home, the more depreciation becomes an issue and replacement cost coverage becomes more valuable. While ACV can save money on your premium, shopping for cheaper coverage may not end with the best coverage YOU need.
Don’t wait for a claim to find out if you have the proper protection you think you do. Your home is one of your biggest investments– take the time to understand your insurance before purchasing it. When shopping for homeowner’s insurance, make sure you do your homework thoroughly—the devil is in the details.
(Source: Property & Casualty Guide)