What's The Difference Between Replacement Cost and Actual Cash Value Coverage

  • March 1, 2021

Most homeowners have Replacement Cost Value (RCV) insurance coverage for wind and hail damage on their homes, but more and more insurance companies are transitioning their policies to Actual Cash Value (ACV) coverage.

What is the difference and why should you understand it? 



It's actually very crucial for you, as the homeowner, to know what type of coverage you have on your property. Failing to understand the difference could result in you having a very unpleasant surprise in the amount of out of pocket expense you have if you file a claim to replace your roof.

ACV coverage means that the insurance company will pay you what the roof is actually worth after being depreciated based on the age of the roof. The funds you receive from your insurance company will exclude the depreciation and your deductible. For example, if your adjuster places a value on your roof replacement of $10,000, but you have a "30 year" shingle on your roof, and your roof is 6 years old, then that means that your roof is 20% depreciated (6 years is 20% of 30 years), therefore, the insurance company will exclude $2000 from the payment of your roof claim. If you have a $1000 deductible, then the total amount you will get from your insurance company will be $7000 ($10,000 minus $2000 depreciation and $1000 deductible). You will then have $7000 to spend as you like to get your roof replaced.

RCV coverage means that the insurance company will pay you 100% of the amount you need to replace your roof, minus your deductible, however, they do this in 2 payments. The first check you receive will be the ACV amount (claim - depreciation - deductible = ACV), then when the job is complete, you'll receive another check for the depreciation amount. If we use the same example as above, you would receive an initial check for $7000, then when the job is complete and the insurance company receives an invoice for the roof replacement being done for $10,000, they will release to you the 2nd check for $2000. You will receive a total of $9000 towards your $10,000 roof. The $1000 deductible is your responsibility to pay towards the repairs.

What this means for you...

As you can see from the examples above, if you have an ACV policy, you will have to come up with more money out of pocket to pay for your roof replacement than if you have an RCV policy. In the above example, you would need to pay your contractor $3000 if you have ACV versus $1000 if you have RCV.

Be sure to understand what type of coverage you have BEFORE you file a claim. The best way to do that is to call your insurance agent and ask.

The video below explains this as well. If you have any questions please call our office at 719-433-6991 or send us an email.

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