Some property insurers in Tennessee have filed to expand or shift their roofing policy terms to include actual cash value policies. What exactly does this mean?
Actual cash value (ACV) policies pay consumers for replacement costs minus any applicable depreciation. Depreciation can be thought of as “wear and tear” or age.
Replacement cost policies pay consumers for what the damaged or destroyed item or structure would cost in today’s dollars. These policies do not account for any wear and tear or for the age of the item.
Replacement cost benefits will generally pay more for a claim than ACV benefits. However, not all dwellings will qualify for full replacement benefits. Determinations are made on a case-by-case basis as companies inspect properties to resolve coverages they may make which is based on the property’s condition and the company’s underwriting guidelines.
For example, a $10,000 roof that is now five years old; when assuming that the roof needs to be replaced entirely and the homeowner has a $1,000 policy deductible.
- Under an ACV policy, the insurance company may determine that $500 of wear and tear/depreciation occurred each year since the roof was installed. At the time of the claim, the company would pay $6,500. Depreciation would have reduced the payment by $2,500 (5 years x $500 of wear and tear per year). The $1,000 deductible would also reduce the payment.
- Under a replacement cost policy, the insurance company would pay the amount required to replace the roof with similar-quality materials at today’s cost, minus the deductible. In the event that the same roof costs $11,000 at the time of the claim, the company would pay $10,000 ($11,000 minus the $1,000 deductible).
It is advised that consumers should shop around when seeking a policy and at renewal to ensure they receive the coverage they want at the price they want. Consumers should also read their policies to better understand their coverage terms.
Our thanks to Insurance Journal for this excellent article.
