Replacement Cost Policy.
The name sounds great, and you were likely sold one of these policies by your agent, who probably told you that this policy will provide coverage to replace damaged items in your home with new ones.
Unfortunately, like most things in your policy, it’s not all sunshine and rainbows and cut-and-dry terms. If you were sold a replacement cost policy, you’ll want to keep reading. I’ll explain exactly what your policy covers and how to maximize the payout from your insurance company, so you’ll get everything you need to actually fix your home and replace your belongings.
Replacement Cost Value (RCV) Policy vs. Actual Cash Value (ACV) Policy
In the insurance world, there are two types of policies: Replacement Cost Value (RCV) policies and Actual Cash Value (ACV) policies. The difference between these two is significant and, if you really dig into it, complex. Wheeler, DiUlio, & Barnabei litigates hundreds of cases where the underlying dispute arises from these two terms. So, what do they mean?
Here is the short version: RCV policies will pay you the actual cash value of your damaged structure or contents, and hold back recoverable depreciation until you spend the money to fix the property or replace an item. Only then can you get that recoverable depreciation from the insurance company. An ACV policy will pay you the actual cash value, but you can’t get that depreciation back.
What Is Actual Cash Value?
The definition of Actual Cash Value is a hotly contested issue, but generally speaking, it addresses the value of your 20-year-old hardwood floor just before a fire damaged it, or the value of your dining room table just before the plumbing leaked all over it.
All things lose value over time. This lost value is known as depreciation. Often, insurance companies will try to depreciate your damaged items simply based on age, but condition is a big factor as well.
So, if you have carpet in that room that no one really goes in, but the carpet it 25 years old, it does not mean the carpet should be depreciated just like any other 25-year-old carpet.
It is also very important to note, only physical items depreciate. Labor does not depreciate. If your insurance company is trying to depreciate anything other than the specific items, call us right away. They are in breach of their contract and likely acting in bad faith, and they cannot be allowed to continue this practice.
What Is Replacement Cost Value?
Now we know what ACV means, so what is replacement cost value? Basically, this is the cost of just going out and buying a new hardwood floor or dining room table. Perhaps you would look to Home Depot or a local hardwood flooring store to get that price, or look to a furniture store for the table. Whatever the materials cost now, that is the RCV.
How Do You Get Depreciation Back?
Ok, so we have the ACV, and we have the RCV, and we know that the difference between those two items is the depreciation. Now, how do you get it back?
The problem with RCV policies is that they only pay you the recoverable depreciation once you have incurred the cost of doing the work or replacing the items. This means the insurance company expects you to have the money in the bank to float for the repairs.
Even worse, most insurance policies only give you a limited amount of time to do the repairs. You should look at your policy to see how long do you have to make repairs before your right to claim the recoverable depreciation disappears.
There are some things you can do to help though. First, the policy only says you need to incur the cost, not that the money has to go out the door. This means that if you sign a contract with a contractor, you have now incurred the entire cost of that contract even before you pay dollar one to the contractor. Providing the signed contract to your insurance company should allow them to release your recoverable depreciation.
In addition, you can always ask for more time. Just like with any contract, the parties can agree to change some of the terms if it is agreed to. So if you don’t have the money right away to pay for the items to replace, ask the carrier for more time. If they are a decent company, they will grant you the time. If they don’t, it would be my suggestion to change carriers right away, because this means the company will keep the money that is reserved for you, and they don’t care about you.
Finally, you don’t have to do all of the work or replace all of the items to get your depreciation back. The estimate your insurance company wrote breaks down depreciation for every item, piece by piece. So if you start doing the work and replacing items, provide the receipts to the insurance company as you get them. They are required to release your depreciation on those specific items as you incur the costs. If they don’t, they are again in breach of their contract with you and you should give me a call.
All in all, replacement cost value coverage isn’t as great as it sounds, thanks to the expectation that you will have the money to float to cover the depreciation. But if you follow the guidelines above, then maybe – just maybe – you’ll be able to pull through. And if the insurance company is giving you problems with this, then you now have an attorney to call.