The Differences Between Replacement Cost Value and Actual Cash Value Insurance Policy

Understanding Michigan Insurance Coverages can get sticky, there are numerous terms and language that most policyholders are unfamiliar with. These include Indemnity, Actual Cash Value (ACV), Replacement Cost Value (RCV) and Depreciation.

What is ACV (Actual Cash Value)?

The term “Actual Cash Value” or ACV is not easily defined. Some Michigan courts have interpreted the term to mean “Fair Market Value.” 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.

What is RCV (Replacement Cost Value)?

The term “Replacement Cost Value” is typically defined or explained in the policy stating the cost to replace the damaged property with the same like kind and quality without the deduction of depreciation. This value is stated to replace in today’s market conditions to bring insured back to pre-loss conditions.

What is Depreciation?

Depreciation is the loss of value from all causes such as age, wear and tear, and deterioration.

What is Indemnity?

Indemnity is probably the most basic and fundamental principle of property insurance. The basic purpose of insurance is to cover a loss that you have suffered. Indemnity is the payment for that loss by the insurer (insurance company) to the insured (you), but for no more than the actual amount of the loss. This allows your property to become “whole” again, meaning the property is restored as it was five minutes before the loss. Indemnity compensates the insured for the loss, but does not allow the insured to make a profit.

An Example of How ACV, Depreciation and RCV Come Into Play Here In Michigan.

Most Michigan Insurance Policy’s have language similar to the one below.

We the insurance company will pay the cost to repair or replace with similar construction and for the same use on the premises, subject to the following: until actual repair or replacement is complete, we will pay only the actual cash value at the time of the loss of the damaged property.

EXAMPLE – Let’s say you have a Replacement Cost Value (RCV) policy and a tree falls on your house and damages your roof. Your roof is 12 years old. Your insurance company is entitled to pay for the damaged items and make you “Whole” again. They will take the age of your roof into factor and give you an initial check for the ACV (Actual Cash Value) to replace the damaged roof. Once you hire a Restoration Contractor and replace the roof, your insurance company will give you the depreciation they held back initially and the check will allow you to collect the full RCV (Replacement Cost Value) of your damaged roof.

In short, Actual Cash Value = Replacement Cost – Depreciation. Hiring a licensed and experienced Michigan Restoration Contractor will help ensure you receive the highest settlement possible for your insurance claim settlement.

Is There Any Way to Get a Better Payout for My Michigan Property Damage Insurance Claim?

Insurers here in Michigan, often prefer paying ACV (Actual Cash Value) claims because they are inherently cheaper for the company and provide more “wiggle room” in depreciation value. Insurers have their own specific formulas for calculating the amount of depreciation, which is then subtracted from the replacement cost. When the policyholder finally receives a check for damages, he or she may be stunned to discover that relatively little of the funds it will take to repair or replace the roof will actually come from the insurance money.

However, there are a few ways policyholders can increase the value of their claims, including:

• Providing accurate paperwork. Business owners may attempt to guess at the age of their roofs rather than show proof of installation. Accurate age of damaged items is crucial to getting fair value.
• Showing proof of recent inspection. It is a good idea to undergo a complete building inspection every few years to maintain accurate records of the condition of your property. An insurance agent will have a harder time subtracting high depreciation costs if you have a report from a roofer that says the roof had only minimal wear and tear a year ago.
• Asking if depreciation may be recoverable. Some property insurance policies allow policyholders to be reimbursed for the depreciation on their lost items once repairs are complete. If a policy allows for recoverable depreciation, the insurer will issue one check for the ACV and send a second payment to cover depreciation once it has proof of replacement.
• Switching to an RCV policy. If you want to get the highest coverage possible before the next storm, you may wish to discuss buying an RCV policy for your business and carefully review the policy limits and exclusions with an insurance professional.