When you file a claim, you will receive an estimate from the claims adjuster of your carrier to bring the property back to the condition it was previous to the loss. You will also receive an estimate to return lost items to you in the condition they were before the loss as well.
This is the ” standard” of insurance practices. Within this, there are two methods of compensating you to bring you to a ” pre-loss condition” . One is to pay you Replacement Cost Value (RCV) and the second is to pay you Actual Cash Value (ACV). What’s the difference between the two? A nasty little insurance word called depreciation.
Almost everything loses value over time. We take advantage of this when we depreciate property at tax time. It also comes to bite us when we file a claim and the insurance company takes advantage of this. Though the ” real estate” itself may actually appreciate – the building components used to construct the building are deteriorating from age and thus lose value a.k.a. depreciate. The same thing happens to contents within the building – for landlords this is mostly appliances.
When your adjuster comes out to settle your claim, they will prepare an estimate of damages and an estimate of value of your contents, then deduct your deductible and deduct the value of depreciation. Depreciation value is often determined by the Property Loss Research Bureau – a third party organization that performs all research related to insurance claims and loss. Typically insurance companies follow their standards.
Here’s where the important part comes in. If you have an ACV policy, you get your check and that’s it. Once depreciation is deducted and you get the actual cash value the claim is settled. You have to come up with the actual amount to do repairs on the property and replace contents. This can be hard as in my experience when I was adjusting – many landlords often have older properties because they often cashflow better than the newer ones. Also, you would be surprised how quickly some contents items depreciate in value…. This leads to greater depreciation and thus a greater amount of cash the investor has to come up with out of pocket to do repairs or replace contents.
However, if you have an RCV policy – you’re in a much stronger position. In an RCV policy, you typically get your actual cash value check when the adjuster first comes out….then you get another check that covers the difference between ACV and RCV after your contractor completes repairs on the property. I have seen RCV checks in excess of $20,000.00 so this is not something to take lightly.
That being said, most landlord policies I have seen are RCV on the actual building and ACV on contents, outbuildings (including detached garages) and fences. This seems to be the best compromise of coverage and cost of insurance for most investors as they can get the RCV coverage on what’s most important and contents are more easily replaced at a lower cost. However, there are occasional insurance policies out there that are ACV on buildings. Consider this a warning of what could happen should you have this kind of policy and suffer a catastrophic loss to your building.