“If I find someone to do repairs for less than my insurance estimate, I get to keep the difference.”
“I need to shop around and get several estimates.”
These are just a few misconceptions that people often have when it comes to understanding how insurance funds work. When the adjuster first hands you a summary page full of terms such as “actual cash value” “replacement cost value” or “recoverable depreciation” it can feel intimidating. This page will help you have a clear understanding of how this all works and help you make the best choice in selecting a quality contractor.
Let’s first become familiar with all of the terms on your estimate and how payments will be made by your insurance.
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What do all these terms mean?
Replacement Cost Value
Replacement Cost Value (also referred to as RCV) is the total amount that your insurance company estimates as the cost of the repairs. Put another way, the RCV is the price assumed that it will take to complete all the repairs. This price will include all the labor, material, permit, and taxes.
It should appear on your estimate summary like this:
What is Depreciation?
After the Replacement Cost Value, the next item you see on the summary above is called Depreciation, and it is subtracted from the RCV amount. If your policy includes Replacement Cost Coverage, this subtracted amount is called “Recoverable” Depreciation and you will be eligible to recover this amount depending on the final cost of repairs.
If your Policy is for Actual Cash Value only, this depreciation will be called “Non-recoverable” and you will not be able to recover this subtracted amount.
So what is it and how is it calculated?
Over time, the materials and contents on your property lose their value due to normal aging and wear and tear. Depreciation is the commonly used term for this gradual loss in value. The initial payment you will receive on an insurance claim is the current value of the item or material with the Depreciation amount subtracted. This amounts to what is called Actual Cash Value, which is essentially the value at the time of the insurance loss.
Deprecation is determined by comparing the age of the item or material with its commonly accepted life expectancy.
Let’s say that you have a roof with shingles that carry a warranty of 25 years. This would be the life expectancy of your roof. Let’s also assume that we can determine when they were installed, and for this example we’ll say that we know the roof is 10 years old. This is about 40% of the roof’s life expectancy which equates to the same amount to be depreciated.
Actual Cash Value
Once the depreciation has been subtracted from the RCV, the remaining difference is the actual cash value or the value of the item at the time of loss.
Cost of a new roof today
$10,000 (RCV) – 40% Depreciation or $4,000 = $6,000 (Actual Cash Value)
The “D” word…
Now we come to the deductible portion of the summary. The deductible is the amount that an insured pays out of pocket as their share of the replacement cost. This is the amount that is agreed upon when an insurance policy is purchased and is listed as part of the “declarations”.
Because the deductible payment is to be “the first money paid” on claims costs, it is also deducted along with the depreciation amount. When the depreciation and deductible have been subtracted, what is left over is called the Net Claim. This will be the amount of the first payment you receive from your insurance company. Since the insurance company understands that you the insured are responsible for the deductible amount, the first check will not include the deductible.
Once repairs have been completed, the depreciation may be requested to cover the cost of those repairs. However, only the actual cost inured may be recovered and it cannot exceed the replacement cost approved by your insurance company.