How the insurance company pays a claim: RCV vs. ACV
When it comes to understanding insurance coverage there are numerous terms that most people are unfamiliar with including Indemnity, Actual Cash Value (ACV), Replacement Cost (RCV) and Depreciation.
Indemnity is probably the most basic and fundamental principle of property insurance. The basic purpose of insurance is to cover a loss that you have suffered. Indemnity is the payment for that loss by the insurer (insurance company) to the insured (you), but for no more than the actual amount of the loss. This allows your property to become “whole” again, meaning the property is restored as it was five minutes before the loss. Indemnity compensates the insured for the loss, but does not allow the insured to make a profit. It is FirstCall’s top priority to see that you are fully indemnified for your loss.
In order to understand how payments are made from the insurance company, you must understand Replacement Cost, Actual Cash Value and Depreciation. Many property owners believe that because they have purchased a Replacement Cost Coverage policy the insurance company will pay them up front for the cost to repair or replace their property to the way it was before that loss occurred, but unfortunately this assumption is inaccurate.
Most policies state:
“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.”
In short, Actual Cash Value = Replacement Cost - Depreciation. The definition of Replacement Cost is the actual cost in today’s dollars to repair or replace an item(s) back to pre-loss condition. Depreciation is the deduction based on the age and useful life of that item(s).
You have a fire loss at your home that was built in 1980. The fire causes $100,000 RCV in damages. The insurance company deducts $30,000 in depreciation from the RCV of $100,000 and issues an ACV payment of $70,000.
If you have an ACV Insurance Policy: You would be paid $70,000 for your loss, but you would not be compensated for the depreciated amount of $30,000. While insurance premiums are lower for an ACV only policy, you may find yourself paying a substantial amount of money out of your own pocket should you incur a loss.
If you have a RCV Insurance Policy: You would only be able to recover the depreciation of $30,000 if you incurred that expense over the ACV payment of $70,000. The insurance company would require additional documentation (i.e. receipts, contractor’s invoices, and/or a completion inspection) before the recoverable depreciation could be paid.
One of our clients recently experienced the frustration many property owners go through when their claim was depreciated aggressively by the insurance company’s adjuster from $110,300 RC to $58,000 ACV. Due to FirstCall’s involvement with the claim, our client was ultimately paid policy limits—over $130,000! FirstCall’s ability to properly prepare, document, present, and negotiate your claim can mean more money in your pocket. Contact us today for a free consultation!