Beware the Actual Cash Value Clause

It is the homeowner’s responsibility to read through their own policy.

Like the water cap, insurance companies are always going to add caveats into your insurance that makes them money. They have to worry about their bottom line.

Just like the water cap, here’s another thing to look out for when reviewing your insurance policy.

Actual Cash Value (which will be referred to as ACV moving forward) at Loss settlement.

NOTE: THIS IS A CLAUSE WITHIN THE BODY OF THE POLICY. YOU MAY HAVE A REPLACEMENT COST POLICY, BUT THIS CLAUSE WILL MODIFY THE POLICY SO THAT THE INSURANCE COMPANY ONLY HAS TO PAY THE ACV FOR A PARTICULAR ITEM. YOUR DECLARATION PAGE WILL STILL SAY REPLACEMENT COST VALUE (RCV).

What does this mean? ACV refers to the total your insurance company will pay out after the depreciation has been calculated out.

Let’s use your roof, for example.

If your roof cost $20,000 when it was first built, and you have lived in the house for twenty years, then the ACV of your roof has decreased. Wind, rain, and hail weather down your roof, depreciating the value. Your roof depreciates about 5% annually, which means that after 20 years your roof is valueless to the insurance company, even though before the “event” your roof protected your home perfectly.

So although it may cost $20,000 to replace your roof, your insurance company only has to give you the ACV, which is usually much less. In this example, it is literally $0.

Those familiar with cars may see the similarity – the minute you drive off the lot, your car has decreased in value. The same concept applies to your roof.

So although you have been paying for insurance you think will protect you, as your roof has done, your insurance company will refuse to pay out for that depreciated roof.

Do not wait until it is too late. Read through your policy.