Our only speaker today was Susan O’Kelley, owner of Avanti Insurance Services in Golden, Colorado. Avanti Insurance Services is a concierge insurance company, as they offer insurance from a variety of companies and are able to find the best insurance for you and your situation. Susan also said now is a good time to do an insurance check-up and make sure that you are still getting the best pricing on your insurance.
Today, Susan wanted to talk to us about the very important difference between Actual Cash Value versus Replacement Cost in your insurance policy.
There are several different methods by which insurance companies may calculate the amount it will pay you a loss. Payment based on the replacement cost of damaged or stolen property is usually the most favorable figure because it compensates for the actual cost of replacing property.
If your camera is stolen, a replacement cost policy will reimburse the full cost of replacing it with a new camera of like kind. The insurer will not take into consideration the fact that it has a shutter count of 20,000 because you’ve used the camera every day for the last two years, causing a considerable amount of wear and tear.
In contrast, actual cash value (ACV), also known as market value, is the standard that insurance companies arguably prefer when reimbursing policyholders for their losses. Actual cash value is equal to the replacement cost minus any depreciation (ACV = replacement cost – depreciation). It represents the dollar amount one could expect to receive for the item if sold in the marketplace.
The insurance company determines the depreciation based on a combination of objective criteria (using a formula that takes into account the category and age of the property) and subjective assessment (the insurance adjuster’s visual observations of the property or a photograph of it). In the case of the stolen camera, the insurance company would deduct from its replacement cost an amount for all the wear and tear it endured prior to the time it was stolen.
What Does “Replacement Cost” Mean?
Simply stated, the term “Replacement Cost” means the cost to replace the property with other property of comparable material and quality used for the same purpose. This applies unless the limit of insurance or the cost actually spent to repair or replace the damaged property is less.
What is “Actual Cash Value”?
The term “actual cash value” is not as easily defined. Some courts have interpreted the term to mean “fair market value,” which is the amount a buyer would pay a seller if neither were under undue time constraints.
Most courts, however, have upheld the insurance industry’s traditional definition: the cost to replace with new property of like kind and quality, less depreciation. Courts have varied in their rulings as to whether or not depreciation includes obsolescence (loss of usefulness as a result of outmoded design, construction, etc.).
What’s the Difference?
The only difference between replacement cost and actual cash value is a deduction for depreciation. However, both are based on the cost today to replace the damaged property with new property.
What is an “Agreed Amount Endorsement”?
This endorsement is an agreement made by the insurance company wherein it waives the coinsurance clause on the specified property. As long as this endorsement is in effect, there would be no coinsurance penalty at the time of a claim.
Insurers usually require a statement of property values signed by the insured as a condition of activating or including an agreed value provision in a commercial property policy.
A word about Insurance to Value (ITV)
Commonly associated with property such as a home or a commercial building, the insurance policy will demand that, at a minimum, the ITV must be 80% of the value to replace/rebuild the property in order for the policy to pay 100% of the RC or ACV. This NOT Market Value; rather, ITV is the current cost of materials, labor, debris removal, engineering fees, permits and general contractor’s overhead and profit. Remember, reconstruction costs more than a new build.
Contractors usually build multiple commercial properties and/or home developments at one time. They bid out projects to sub-contractors to obtain the lowest pricing. This bidding process applies to labor as well as materials. For example, the cost of 1 single kitchen sink may be as much as 40% greater than purchasing 30 kitchen sinks (per unit). For this reason, building a single home costs considerably more than the actual cost of a developer constructing multiple homes
Examples of ACV vs RC
• High Value Art appraised at X that appreciates without changing the policy limits.
• Case Study: Winslow Homer listed on a home policy with a stated value of $20,000
but the market value has appreciated to $1,000,000…Claim will be settled at $20,000.
• High Value Vehicles on a standard Personal Lines Policy.
• Case Study: Collection of exotics with a combined value of $ Actual Cash Value vs
Replacement Cost 400,000 will be settled on ACV which is potentially a greatly
• Older Buildings excluded from Replacement Cost settlement.
• Case Study: Insurance policy for a Building that is over 100 years old will only be
settled bound with ACV.
• Roofs excluded from Replacement Cost Settlement.
• Case Study
A) Insurance policy for a Roof that is over 25 years old will only be settled on ACV
B) Prior insurance claim for roof settled at ACV but roof not replaced;
C) Non-standard roofing i.e. layers of roofing over portions of the roof without a
full roof replacement.
• Fences and Other Structures excluded from Replacement Cost Settlement.
• Case Study: Homeowner assumes that damaged fence or separate shed will be
replaced at Replacement Cost only to find their standard HO-3 Policy has exclusions
defining ACV settlement.
If you are looking for an insurance agent that will listen to your needs and will educate you to the choices you have give Susan O’Kelley and the Avanti Insurance Services team.
Susan O’Kelley * Avanti Insurance Services * 303.278.2278 * firstname.lastname@example.org * myavantiservices.com