Have you ever filed a claim on your homeowner’s insurance? If not, you may not be clear on what your policy pays for until damage has already been done. When it comes to wording, it’s important to know the meaning of all terms concerning your coverage. A frequent question we get in our office is “What is the difference between actual cost value and replacement cost?” Actual cost value (ACV) means the amount something was originally worth, minus the depreciation based on its age. If this is the type of coverage on your policy you will not be covered for all costs. Replacement cost covers the true value of what it will take to rebuild/replace something.
We think it’s best to use an example to explain these two terms. Let’s say for instance that your roof is damaged in a storm and needs to be replaced. The first step is to call your account manager so they can start the claims procedure with the insurance company. After an adjuster processes the claim the homeowner will receive an amount of money to cover the damage repair costs.
This is where some confusion can happen. When a homeowner has replacement cost coverage on a policy they often expect to receive a check for the full amount right away. However, this is not the case for the claims process. The homeowner will first get a check for the actual cash value of our claim minus the set deductible. This money can be used as a down payment for the contractor who was hired to fix the roof. As soon as that contractor has completed the replacement and they will issue a final invoice for the remaining balance between the amount paid and the total job cost. At that point the insurance company sends the homeowner a check for the remainder of the contractor’s bill. A new roof has been installed, replacement cost was paid, and the homeowner is not out of pocket for any unforeseen costs.
If you need help understanding any terms or items on your homeowner’s insurance, please don’t hesitate to call. Remember that your friends in the insurance business are always available to help.