With Wind & Hail Season Coming Up…Will Your Roof be Replaced Using Actual Cash Value or Replacement Cost?
There are several different methods by which your insurance company may calculate the amount it will pay you for a loss. Payment based on the replacement cost of damaged or stolen property is usually the most favorable figure from your point of view, because it compensates you for the actual cost of replacing property. If your roof is damaged by a hail storm, a replacement cost policy will reimburse you the full cost of replacing it with a new roof of like and kind. The insurer will not take into consideration the fact that your roof is, for example,10 years old.
In contrast, actual cash value (ACV), also known as market value, is the standard that insurance companies arguably prefer when reimbursing policyholders for their losses. Actual cash value is equal to the replacement cost minus any depreciation (ACV = replacement cost – depreciation). It represents the dollar amount you could expect to receive for the item if you sold it in the marketplace. The insurance company determines the depreciation based on a combination of objective criteria (using a formula that takes into account the category and age of the property) and subjective assessment (the insurance adjuster’s visual observations of the property or a photograph of it). In the case of a damaged roof, the insurance company would deduct from its replacement cost an amount for all the wear and tear it endured prior to the time it was damaged. In the example above, that the roof was 10 years old.
What Does “Replacement Cost” Mean?
The term “replacement cost” is defined or explained in the policy. Simply stated, it means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose.
What is “Actual Cash Value”?
The term “actual cash value” is not as easily defined. Some courts have interpreted the term to mean “fair market value,” which is the amount a buyer would pay a seller if neither were under undue time constraints. Most courts, however, have upheld the insurance industry’s traditional definition: the cost to replace with new property of like kind and quality, less depreciation
So What’s the Difference?
The only difference between replacement cost and actual cash value is a deduction for depreciation. However, both are based on the cost today to replace the damaged property with new property.
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