With insurance, the devil is in the details.  With so many abbreviations and industry specific terminology, shopping for the right coverage can often seem daunting.  One of the most important things to know about your homeowner’s insurance policy is the policy’s loss settlement method.  Loss settlement types refer to the way the insurance company will settle your loss and value your property in the event of a claim.  There are two types of loss settlements: ACV (Actual Cash Value) and RCV (Replacement Cash Value).  Knowing the type of loss settlement method your policy includes is incredibly important as it determines what you will, or often won’t, receive in the event of a loss.

 

Roof

Let’s review by using the example of a roof with a 20-year life that is 10 years old and that would cost approximately $10,000 to replace.

 

In the event the roof is damaged and must be replaced, an ACV (Actual Cash Value) settlement method will consider the cost of depreciation of the roof before settling the claim for a dollar amount.  For example:

  • Cost to replace the roof = $10,000
  • Roof is 10 Years old x 5% Depreciation per Year = 50% Depreciation
  • Settlement from Insurance Company = $5,000 (after applicable deductible)

 

Seems a little unfair, right?  This settlement type will leave the insured with a $5,000 out of pocket expense in addition to his or her deductible.

 

Now let’s look at the same loss situation under an RCV (Replacement Cash Value) settlement method.  In the event of a loss, an RCV settlement type will NOT consider deprecation as part of the settlement in the event of a claim.  For example:

  • Cost to replace the roof = $10,000
  • No Depreciation subtracted
  • Settlement from Insurance Company = $10,000 (after applicable deductible)
Appliances
Appliances depreciate 15% per year
Clothing
Clothing depreciates 50% per year
Home Electronics
Home Electronics depreciate 25-50% per year

For many insureds who either do not understand, or were not properly informed about their policy’s settlement method, this can be a rude awakening at the time of a loss.  At SSIA, we recommend RCV settlement types for all homeowner and dwelling policies.  Please don’t forget that the contents in your home depreciate too! Depreciation is based on the lifespan of the item. For example:

Remember, it’s not just about the deductible at the time of a loss, but also the settlement method.  If you need assistance reviewing your policy for these details, feel free to give us a call.  Don’t allow the devilish details cost you more than you anticipate!