CLASH OF COVERAGE | WHY YOU NEED TO HAVE REPLACEMENT COST
Replacement Cost (RCV)
The best coverage is “guaranteed replacement cost,” which pays for rebuilding, no matter the cost. But it’s expensive, and it might not be available. Next best is “extended replacement cost,” which caps coverage at about 20 percent more than replacement value. Policies also cover your home’s contents, such as furniture, clothing, electronics, musical instruments, and so on, for 50 to 70 percent of the replacement cost.
RCV is a term used in the insurance industry to indicate that covered losses will not be paid out with depreciation. Lets take a look at an example:
Computer, Brand New.
Deprecation, 10 years Old.
Actual Cash Value (ACV)
Replacement cost guarantees you will get the full $850 for the computer. Without this endorsement you will get $150. This comes at a cost however. It is certainly additional premium to have replacement cost. It is important to note that many companies in modern times only offer replacement cost. It is far and away the better option and is what most expect anyway.
This coverage also applies to your home as well. Believe it or not you can actually cover your house with actual cash value. Why would anyone do that you ask? Well there are a couple reasons. First off it is much, much cheaper. If your only concern is getting the lowest premium possible this may be the option for you. Secondly, sometimes folks don’t want to rebuild. The market value of homes can vary greatly depending on where it is located. This is sometimes considered by the insured when deciding what type of coverage to go with.
Market value DOES NOT = replacement cost! These two numbers are not mutually exclusive. They can be the same or different. Again, the area a home is located can cause a dramatic difference between what a consumer may pay for a home versus what it would cost to build the home brand new.
What is actual cash value coverage? (ACV)
This means there will be a deduction for depreciation. It is a way to cover your home or personal belongings. It is commonly referred to as ACV. It is only recommended for premium reduction reasons. Many companies do not even offer this type of coverage anymore because it just simple is not adequate.
This type of coverage is most commonly seen within a renters policy. The scenario would be you are being forced into buying the policy by the renting office. In this case, if you ask for the cheapest policy because you truly do not care about coverage, actual cash value makes sense.
Replacement Cost vs. Actual Cash Value
Imagine this scenario. Bill and Barb purchased a new home for $125,000. They purchase an actual cash value policy from there local broker for the dwelling and personal property. On a freezing cold night, one of the many pipes in between the first and second floor freezes and subsequently bursts. This causes a massive leak that results in major renovation. The damage is estimated to cost $35,000.
Bill and Barb purchased insurance like they were supposed too, it was the responsible, prudent move. So they will be all set right?
The house was originally built in 1975. The actual cash value policy will pay minus depreciation. The insurance claims adjusters offer is $22,500. leaving Bill and Barb on the hook for the rest.
If they had a replacement cost policy this could of been avoided.
When buying a home this can becomes extremely confusing and convoluted. When the mortgage company gets involved, there is often a very long winded over worded mortgage commitment letter that does nothing but confuse everything.
Here is the jist of what you will need to make sure of to satisfy everyone:
You will need either replacement cost, or the value of the mortgage for the coverage amount. That’s it. One or the other. You don’t have to stress over this part of the home buying process.
When you are speaking with your agent or comparing with other companies it is important to understand the terminology used. First and foremost, where do you find the replacement cost? It is located on the declarations page, or dec page for short. This is where almost everything you will need is located. It is part of the initial paperwork that is sent to you when you sign up with a company and the subsequent renewals.
Here are a few keywords to remember: Coverage A, dwelling coverage, and replacement cost.