Depreciation Basics on Replacement Cost Value Policies
The Main Concern: I have a Replacement Cost Value (RCV) insurance policy, my adjuster came out and gave me an estimate, but I don’t really understand what all these numbers mean!
Example and Explanation: I have a RCV Policy, received an estimate that said $1,000,000 dollars RCV, $500,000 ACV, but then I only received a check for $450,000! What is going on?
So here’s the deal…
1. The way insurance companies calculate your loss value is via a standardized estimating program (almost always Xactimate). They do this because it ensures they are treating all insureds fairly and equally, and, since the costs are standardized by location and market conditions, it’s more fair than simply asking for contractor bids which could vary wildly based on contractor quality and certification.
2. Your Insurer has generated an estimate that says your loss valuation is worth $1,000,000 (for sake of our argument we will pretend that there are no custom or unique circumstances with your loss). The Insurer then takes into account the ages of the affected property (either via your recollections of the age or by their visual approximation if you are unsure), depreciates the property by age and use, and determines that your property has depreciated by $500,000 and is therefore currently worth $500,000 Actual Cash Value (ACV).
3. The insurer then prepares a check to be sent to you but notices that you have a deductible of $50,000. As the insured, you are required in Colorado to pay your deductible (by law), so the insurer reduces the $500,000 to $450,000 to be certain that your deductible is accounted for.
DON’T FREAK OUT! Many insureds in this scenario would get their check for $450,000 and would believe an enormous error has occurred and that they will not receive the $1,000,000 (950k if you factor in the deductible) that they are owed. Have no fear. You can receive up to the remaining $500,000 being held in depreciation upon providing the insurer with confirmation of work completion, and, typically, an invoice that states the total cost for work performed requires the release of depreciation. For instance, if a contractor does all of the work for $500,000 total, then you would receive none of the depreciation because the cost of the completing the work did not exceed the ACV + your deductible. But, if the invoice was for $1,000,000, the insurer would issue a check for the remaining $500,000.
Takeaway: If you have a Replacement Cost Value (RCV) Policy, your insurer will send you an initial check for the Actual Cash Value (ACV) of your loss. That means the first check you receive from your insurer will = the estimated loss value – depreciation (held back by the insurer to be released as needed) – your deductible. You can collect some or all of the deprecation once you provide an invoice showing the insurer that you used more than the initial check + your deductible to complete the work the insurer had noted as needing to be done.
If your loss looks like it will cost you more than what the insurer has provided, click here!
If you what to know how you can utilize your funds to complete work/what you are allowed to do, click here!
If you are wondering if you can just pocket the money the insurer has provided you, click here!
-Article written by David Phalen, Executive General Adjuster of Solutia Adjusters.