Replacement Cost vs. ACV
How Is My Property Loss Covered.
When purchasing property insurance, it can be easy to focus on the limit of property coverage you are buying while overlooking the type of property coverage you are buying. However, taking the time to understand if your policy is offering Replacement Cost or Actual Cash Value coverage can be just as important as the limit itself. While both types of coverage are subject to your property deductible and the conditions of the policy, the amount of reimbursement you receive from the insurance company after a loss may shock you if you unknowingly have the wrong coverage.
What is Replacement Cost Coverage?
In its simplest form, Replacement Cost coverage provides the actual amount to repair or replace the covered property. The intent of this coverage is to make you whole again after a covered loss. If the property can be repaired it will be and if the property needs to be replaced the insurance will pay for a replacement of the same like, kind, and quality. This is what is typically expected with property coverage.
What is Actual Cash Value Coverage?
Actual Cash Value is essentially Replacement Cost coverage that is then reduced by depreciation. The reimbursement you receive for a covered property loss is only a portion of the actual cost to repair or replace the property. If your property is older and has already used half of its expected life, you may only receive a payment for half of the cost to repair or replace this property.
Make Sure You Take a Close Look at Your Coverage
DCI just recently assisted a new client who owns a 101 year old building in which the first story is their store and the second story is their home. While we were doing a comprehensive review of the previous insurance program they have had setup for many years we uncovered their property was covered on an Actual Cash Value policy. Even though this policy was through a large carrier who I am sure you are familiar with their advertisements, their previous agent had them unknowingly at risk. If there was a fire that destroyed the entire building the insurance would not pay enough to rebuild both their home and business. Fortunately we were able to catch this before they experienced a shocking loss however this is one of the many reasons I encourage you take the time to make sure you are not in a similar situation.