Wednesday, October 31, 2012

After Hurricane Sandy: Difference between RCV and ACV Insurance

RCV vs. ACV Property Insurance

If and when it's time to file an insurance claim for property damage as a result of Hurricane Sandy, or any other type of casualty, it is important to know whether you obtained Replacement Cost Value ("RCV") or Actual Cash Value ("ACV") from your insurance carrier.

What Is The Difference Between RCV and ACV?

The short answer to the question is...depreciation.  The best way to explain the difference is by giving the following example:

Hypothetical Assumptions:
- You paid $10,000 for a roof that was supposed to last ten (10) years ("Estimated Useful Life")
- Throughout the Estimated Useful Life of the roof, the estimated value of the roof decreases as follows:

Year 1: $10,000
Year 2: $9,000
Year 3: $8,000
Year 4: $7,000
Year 5: $6,000
Year 6: $5,000
Year 7: $4,000
Year 8: $3,000
Year 9: $2,000
Year 10+: $1,000

The "What If":
Using the above hypothetical assumptions, if Hurricane Sandy or any other casualty damaged your roof, the Replacement Cost Value (RCV) and Actual Cash Value (ACV) would result in the following depending on the time it happened within the estimated useful life of the roof...

Year Depreciated
of Roof     RCV - Value = ACV
Year 1 $10,000 $0 $10,000
Year 2 $10,000 $1,000 $9,000
Year 3 $10,000 $2,000 $8,000
Year 4 $10,000 $3,000 $7,000
Year 5 $10,000 $4,000 $6,000
Year 6 $10,000 $5,000 $5,000
Year 7 $10,000 $6,000 $4,000
Year 8 $10,000 $7,000 $3,000
Year 9 $10,000 $8,000 $2,000
Year 10 $10,000 $9,000 $1,000

Problems with Actual Cost Value (ACV)

Using the hypothetical above, if your roof was 8 years old at the time Hurricane Sandy damaged your property, the insurance company would only pay the $3,000 ACV amount towards replacing your roof.

To make matters worse, when it comes time to find a roofer to repair or replace your roof, the cost for a new roof will most likely exceed $10,000 due to limited supply of roofing materials, and increased demand.  While you may have thought you were protected by obtaining sufficient insurance for a $10,000 roof, by only receiving the Actual Cash Value, less any insurance deductible and other expenses, you may find yourself significantly under-insured.

Benefits of Replacement Cost Value (RCV)

Although the above hypothetical assumes the cost of a new roof is $10,000, the costs for replacing roofs, appliances, equipment, etc. can rapidly inflate as a result of the increased demand and limited supply of the needed items.  By having Replacement Cost Value, the insurance company needs to determine the cost to replace the roof at the time the insurance claim is made (i.e., post Hurricane Sandy).  Thus, even if it is well documented that you paid $10,000 for the original roof, if a new roof post Hurricane Sandy costs $13,000, then the true RCV should be $13,000.

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