Replacement Cost Value vs. Actual Cash Value

Why This Is the Most Important Thing to Know Before Filing a Claim

Do you want to pay a simple deductible or $20,000 out of pocket for your roofing claim? If you want the lesser amount, then this is a MUST READ.

Are you expecting your insurance company to pay for repairs after a storm? Most homeowners are. But most homeowners don’t even know what is in their policy or what it covers. If you don’t know, you could end up footing the bill.

Insurance policies change all the time. To be clear, this blog is written from our perspective as roofing contractors — not as policy experts. We’re sharing what we’ve learned from years of working on insurance claims. Your insurance agent is the person to talk to about specifics, but our goal is to give you enough clarity on the differences between policies so you can have a better conversation with your agent.

What Is Depreciation?

Depreciation is simply a decrease in value over time. Every year that a roof has been installed, it will decrease in value. How depreciation is handled is the main difference between RCV and ACV policies.

For super easy math, take a shingled roof that has a 30-year warranty and say the value for that roof is $30,000. Every year that roof has been installed, it will depreciate $1,000. When that roof hits 15 years old, the value of the roof is now only $15,000 — which is the Actual Cash Value (ACV). The depreciated value is $15,000.

Unless you were an accounting major, depreciation might not fully sink in. Re-reading the depreciation section a time or two might help.

What Is Replacement Cost Value (RCV)?

In simple terms, a Replacement Cost Value policy covers the full cost of repairs minus your deductible. Under this type of policy, the depreciation on your claim is recoverable — meaning the insurance company will release the depreciated amount back to you once the repairs have been completed.

This is the coverage you want. Make sure to confirm it with your agent and ask them to show you exactly where it’s stated in your policy. If you don’t know where it is and a problem arises, it’s simply your word against theirs.

What Is Actual Cash Value (ACV)?

An Actual Cash Value policy means the depreciated portion of your claim is non-recoverable and will not be returned to you, even after the work is completed. These policies are usually cheaper — and this is one of those cases where cheaper is definitely not better.

Red flag: If you see anything in your policy that says “Roof Payment Schedule,” that’s an ACV policy. A roof payment schedule tells you the age of your roof and how much the insurance company will pay based on that age. The older the roof, the less they pay.

These policies can be set up this way from the start, or your policy can begin as RCV and automatically convert to ACV once your roof hits a certain age — often around the 10-year mark.

Let’s Look at the Numbers

Scenario 1: A 15-Year-Old Roof

Hail destroys your roof. Your insurance company determines it needs to be replaced. The roof is rated for 30 years and is currently 15 years old, so the depreciation factor covers 15 years.

Total claim value: $20,000

With the RCV policy, the depreciation is recoverable once the work is done, so your only expense is your $2,000 deductible. With the ACV policy, the depreciation will not be returned to you — and you will be paying $12,000 out of pocket.

Scenario 2: A 25-Year-Old Roof

A potential customer we were working with filed a claim not knowing that they had an ACV policy on the roof. Let’s just say they were shocked by the outcome when they received the payout from their insurance company. Here is what happened. A hailstorm damaged the roof and guttering totaling $30,000. The roof was rated for 30 years but was 25 years old. This is how ACV affected their payment.

Total claim value: $30,000

Look at those numbers on the ACV side. The insurance company only pays $2,000 on a $30,000 claim. The homeowner would be on the hook for $28,000. In a case like this, filing the claim probably shouldn’t have happened. There was no real benefit. And here’s the thing — depending on how bad the hail damage actually was, that homeowner might have been able to get many more years of life out of the existing roof and saved a claim on their record.

Found Out You Have an ACV Policy? Now What.

This may sound like bad news, but to be honest this could be great news because you might’ve saved yourself a major financial problem that you weren’t prepared for. The first step would be to talk to your agent about the option to get an RCV policy. Just like there are differences between roofing contractors, there are differences between insurance companies. If your current insurance company doesn’t write RCV policies on an older roof, that doesn’t mean another insurance company won’t.

There are some occasions where a roof can be so old or in such bad condition that it might be necessary to replace it out of pocket rather than through an insurance claim. Once the roof is replaced, make sure an RCV policy is fully in place.

The Bottom Line

It is so important to know what is in your policy! Life is busy — I totally get that — but this could be the smallest and simplest adjustment you make that saves you a ton of heartache down the road.

Since depreciation is the main factor in roofing policies, here is a question for you. Do you know the exact age of your roof and the warranty of the shingles on your roof? If you don’t, doing a little research to find out is a good idea. From there, ask your agent what they have on file as the age of your roof. Reconciling that will decrease problems during the claims process.

What About the Current State of Your Roof?

Most people aren’t getting up there to take a look, and that’s where we come in. Finding out the state of your insurance policy is extremely important, but now let’s find out the current state of your roof. Don’t know the current condition of your roof? Not sure if your roof has sustained hail or wind damage? Not sure if it is time to file an insurance claim? With a simple call  to Green Country Roofing, we can assess and bring clarity to the insurance process. Call now (918) 992-4665.