ACV vs. RCV in homeowners insurance claims

How does depreciation work for property damage claims in Florida?

The purpose of homeowners insurance is to make a homeowner whole after he or she has suffered accidental damage to their property. Insurance is meant to restore you to the pre-loss condition with like-kind and quality materials.

When a claim is paid, the insurance policy typically requires the initial payment be “at least actual cash value.” An insurance company can choose to voluntarily pay replacement cost value, or it can withhold that amount until the repairs have been completed.

But what do these terms mean, and how might they apply to your situation?

What is Actual Cash Value?

Actual cash value is the value of the damaged materials as they existed right before the loss. It’s often described as the full replacement cost value, less depreciation.

Depreciation is a calculation of how much of the useful life of a material has been expended right before the loss occurred. 

The easiest analogy that people understand most easily is when thinking about used cars. Everyone knows that once a car is driven off the lot, the value starts to go down. They don’t last forever, and the more use they see (either through driving and mileage, or sheer age) the less likely they are to last.

In theory, your home’s building materials operate the same way. Roofs on Florida homes typically have a useful life of somewhere between 25 and 50 years, depending on whether a roof is made of shingles, tile, or metal. Cast iron plumbing typically has a useful life of 40-50 years. Paint typically has a useful life from 7-20 years. Cabinets have a really wide range of useful life because of materials. Solid wood cabinets have extraordinarily long useful lives, while some cabinets are made of materials slightly nicer than cardboard and have a short useful life.

What is Replacement Cost Value?

Replacement Cost Value is the cost to replace a building material with like-kind and quality materials at today’s prices for brand new materials, regardless of how old the damaged material was at the time of loss.

Replacement Cost is a standard often used with homeowners insurance because unlike our used car example above, there isn’t a significant market for used building materials like there is with automobiles.

If your home sustained damage to your kitchen cabinets as a result of a plumbing leak, and your cabinets were 21 years old, it is likely impossible to go out and find the exact number of cabinets, the exact lengths and sizes of cabinets, of the same or similar materials, that are exactly 21 years old. You have to buy new cabinets. Whereas, if you were in an accident in a 10 year old car, you could go purchase a similar 10 year old car, or parts for that same car.

What does this mean for my homeowners insurance claim?

Most insurance policies require the insurance company to pay at least the actual cash value up front. This means that you are paid the depreciated value for the damaged property, because this is what makes you whole... initially. Why? Because you might never do the repairs. 

You might decide to keep the money and leave the property damaged, or sell the property in as-is condition. If this is the case, you’ve been made whole because you were paid for what the damaged property was worth, similar to a used car. If your used car is totaled and they pay you the value, you can do whatever you want with that money.

If you decide to do the repairs, however, you likely can’t buy used building materials and need to buy new ones, so you are typically entitled to recover the depreciation when you’ve undertaken the repairs. If they paid you half the cost of your 15 year old roof when it was damaged, once the repairs started, you’d get the other half.

Is there a catch to recovering depreciation?

Of course there’s a catch! Your insurance policy says it “will not pay more than it actually cost to repair or replace the damaged property.” So, if you had a 15 year old roof that was damaged by a hurricane, and they set the replacement cost value at $30,000, and initially paid you the actual cash value of $15,000, if the full replacement only cost $22,500, you would only receive the $22,500 you paid, and not the $30,000 replacement cost value that was set up front. 

This is a common insurance company tactic. If there are very wide differences between actual cash value and replacement cost value of your loss, you’d receive a very limited budget up front and be motivated to find a good deal so you don’t have to come out of pocket when doing repairs. The problem is, any bargain you find and negotiate isn’t a bargain for you, it’s a bargain that’s being passed on to the insurance company!

Do insurance companies abuse depreciation?

You bet they do! We mentioned above items that are commonly and justifiably depreciable. Roofs and cast iron plumbing have the most verifiable useful lives. Cabinets and paint have much more debatable useful lives. Insurance companies, though, push that depreciation button to their advantage.

VIP Adjusting’s public adjusters commonly catch insurance companies in the act. Some insurance companies depreciate drywall. More than once we’ve asked out loud “when was the last time you heard of someone tearing down and replacing all their drywall just because it’s old?” Never? Neither have we.

Sure, in theory every building material has a useful life, but who gets to decide? How is it calculated? Has the insurance company explained this to you? In the example above, does drywall have a useful life of 20 years? 100 years? 150 years? Is there any documented evidence of drywall ever failing because of old age?

Maybe even more egregious, we’ve caught insurance companies depreciating non-building materials. We’ve routinely busted insurance companies depreciating masking tape and prep-work for painting. That happens often. Less often, but more than once, we’ve caught an insurance company depreciating a dumpster rental for the dumpster that is used to remove the construction materials at the end of a job. 

Some “independent” adjusters just depreciate at a flat percentage across the entire estimate. This is improper and unethical.

Depreciation is one of those small things that are easily overlooked by homeowners as part of their insurance claim. VIP Adjusting is always forward thinking when it comes to your claim and we fight for you. We question the insurance company’s methods in depreciating because if they’ve withheld money up front that you’re entitled to, that’s more money in your pocket to do the repairs.

If you’ve previously made an insurance claim for property damage, contact VIP Adjusting today for a free claim review. 

You might also be interested in:

Why you should hire a public adjuster

Public Adjuster vs. Independent Adjuster: What’s the difference?

Depreciation plays a large role in personal property claims involving break-in, theft, or vandalism