Actual Cash Value
While you may have purchased replacement cost coverage, an insurer is not obligated to provide payment of an agreed replacement cost up front. Settlement will first be paid as actual cash value (“ACV”) at time of loss. ACV is usually defined as replacement cost less depreciation to equate to value at time of loss. It may also be determined as market value for personal property, for instance. However, when expecting the adjustment payment on damage to your property, don’t expect full replacement cost to be paid immediately. The insurer will first pay only the ACV less any applicable deductible.
Time Limits for Replacement Cost
Most property insurance policies contain provisions that limit the time for you to exercise replacement. Policies invariably provide that the insurer will first pay ACV and then, if replacement is completed within 180 days from date of loss (sometimes date of payment of ACV), you are entitled to make claim for the withheld depreciation amount. Be careful to comply with time limits or ask for extensions that are usually granted. And, make sure if costs are greater than the estimated RCV, you advise your insurer or they may resist payment to full replacement cost where it was greater than agreed.
Great controversy exists where building materials are no longer available and replacement cost coverage is provided. Insurers may take the position that the payment owed is only for areas that are directly damaged. Consequently, you may find yourself with different colors of roofing materials on adjacent areas of the roof. Or, you may find the insurer authorizing replacement of one area of siding and painting that area but not all sides to match. You may suffer damages to flooring that is continuous throughout the home and have the insurer take the position that replacement cost does not include replacement of other adjacent areas simply to match finish. Florida, and a number of other states, have dealt with such controversy by adopting legal precedent or changing laws to ensure that matching issues are resolved in favor of the insured. Generally, circumstances where the property involved would suffer loss of value or appearance because of matching issues, insurers are forced to comply with reasonable matching requirements. “Line-of-sight” adjustments are common compromises wherein flooring that is continuous and within line-of-sight will be replaced to match even if undamaged.
Repair vs. Replacement
Insurers are not liable under a policy to replace damaged property if repair will restore the property to pre-loss condition. So, if you suffer damages to a roof but the damages are not enough to warrant total replacement, it may be permissible for the insurer to limit claim to the repair costs. Loss to a kitchen cabinet, for example, may be adjusted on the basis of repair, even where the cost to repair or replace a damaged cabinet may be greater than comparable replacement of a single cabinet and thus avoid replacement of all cabinets. Insurers have the option under the contract to repair or replace, but once they make that election, they become liable for the full costs. Accordingly, where you may disagree with the insurer on this issue, require them to invoke their right to repair in writing and hold them to it. Many policies are now sold with clauses to specifically allow insurers to exercise repair with their own approved contractor. Ensure that these contractors are held to the same standards as you would require of any contractor under the insurance contract. And, be aware of building codes that may prohibit repair where, for example, in a High Velocity Wind Zone, roof coverings must be replaced if damages exceed 25% of a section or roof area.
Most insureds do not have knowledge that allows them to assess the costs to rebuild their property. Values of insurance are often derived based upon past amount or by formula that are average costs based upon area and finish. Insurers require insureds to carry insurance to percents of replacement cost in order to recover replacement cost payment; usually to 80% or 90% of the estimated replacement cost. If an insured fails to purchase adequate limits, they may find themselves underinsured and an unwitting co-insurer. In effect, the insured will suffer a penalty at time of loss if they are underinsured; not to mention that if a total loss is suffered, the insured will end up paying additional amounts over the policy limits for the full replacement. It is important for insureds to have knowledge of their property’s replacement value. Beware, often agents will advise you are only required to purchase certain amounts of coverage. They are aware that the premium will be less if less coverage is purchased but the insured will suffer the consequence if underinsured.