Welcome back to our insurance terms series! Jim Black Construction is dedicated to helping our customers understand the repair process, a large part of which involves knowing what you get with your insurance money, which leads up to this month’s topic: depreciation.
As we’ve stated before, insurance is paying to replace items with the like kind and quality of products in your home, but everything has a design life or expected expiration date. What happens when items that need to be replaced aren’t brand new? Depreciation is the amount assessed by insurance that is the difference between a newly purchased item and your specific item at the time of loss, which includes factors such as age, wear, condition, and any previous damage. Depreciation can apply to almost anything related to your home, from your roof to the flooring to all your personal belongings held inside your home.
For example, the design life for a water heater is 8 – 12 years, which we’ll average to 10 years for our purposes. If your two year old water heater is destroyed, it’s lost one fifth, or 20%, of its value in depreciation. If your water heater is eight years old when it’s destroyed, it’s depreciated 80%.
The design life of an item will strongly affect the depreciation, so it’s important to remember that everything will depreciate at a different rate. Your roof is designed to last decades, so it depreciates slower than the water heater from our example. Along the same vein, a laptop will depreciate very quickly because technology continues to advance drastically year to year, so a laptop’s design life is based on how quickly it will become obsolete. We’ll address more specifics related to your home’s contents, like clothing and electronics, in a future post.
ACV vs RCV
When a quote is received from your insurance or restoration company, you may see several numbers for the same line item: RCV, depreciation, and ACV. RCV is the Replacement Cost Value, which is how much it costs to replace the damaged item if it were new. ACV stands for Actual Cash Value, or how much the insurance believes your specific item, in the condition it was in at the time of the loss, to have been worth. Depreciation is the difference between the assessed RCV and ACV amounts.
Now, when it comes to the assessed ACV and depreciation amounts, you can make a case to your insurance company that items were in better condition at the time of the loss than they are assuming and other things to increase your ACV amount. The thing with ACV and depreciation is that you might not need to worry about those amounts depending on the type of policy you have.
A large number of policies anymore are specifically written to pay out the RCV amount within your policy limits. Check with your insurance agent about what your policy parameters entail because this could make the difference between just paying your deductible or paying your deductible plus any depreciated amount to replace the ACV items.
If you have an ACV based policy, the insurance pays your ACV and no depreciation. You will have to decide how or if you want to pay the additional funds to purchase the same like, kind and quality product you originally had.
In an RCV policy, the insurance payment still starts at the ACV amount. You and your contractor would start by submitting a bid to replace anything damaged in the loss to the insurance, which the insurance company would either approve or return with notes about items they don’t believe need full replacement or have concerns regarding the replacement cost. Once the estimate is approved by your insurance, work can commence. At job completion, it is your responsibility, and that of your contractor depending on how they were hired, to submit invoices, which will serve as proof that the RCV amount they approved was, in fact, used to replace those items. Basically, you have to spend the money for insurance to pay the money. It should also be noted that if you hire another contractor who discounts their estimate, the insurance company will only pay on the invoice from the contractor that did the repairs, not the original agreed insurance amount.
As always, please check with your insurance agent to review your policy specifics, but we hope you have again enjoyed our attempts to make this complicated and frequently misunderstood topic a little easier to comprehend.