Understanding the Difference Between ACV and RCV in Homeowners Insurance

When purchasing a homeowners insurance policy, one of the most important decisions involves choosing between Actual Cash Value (ACV) and Replacement Cost Value (RCV) coverage. Both determine how much your insurance will pay after a covered loss, but they differ significantly in how claims are calculated and how much financial protection they provide. Below, we’ll explore these concepts in detail to help you make an informed decision.

What Is Actual Cash Value (ACV)?

Actual Cash Value coverage reimburses the policyholder for the current market value of damaged or destroyed property, factoring in depreciation. Depreciation accounts for the age, wear and tear, and reduced utility of the item over time.

• Example: Suppose a 10-year-old roof is damaged in a storm, and the cost to replace it is $15,000. With ACV coverage, the insurer may deduct $7,000 for depreciation, reimbursing only $8,000.
• Pros: ACV policies generally have lower premiums, making them a more affordable option for homeowners.
• Cons: You may face significant out-of-pocket expenses if the payout does not cover the cost to replace the damaged property.

What Is Replacement Cost Value (RCV)?

Replacement Cost Value coverage pays the full cost to replace the damaged or destroyed property with a new equivalent, without factoring in depreciation. This ensures that policyholders can restore or replace their property to its pre-loss condition.

• Example: Using the same scenario, an RCV policy would pay the entire $15,000 to replace the roof, regardless of its age or condition before the loss.
• Pros: RCV coverage offers greater financial security by minimizing out-of-pocket expenses after a loss.
• Cons: Premiums for RCV policies are higher due to the increased level of coverage.

How Insurance Companies Pay Out ACV and RCV Claims

Under most homeowners insurance policies with RCV coverage, the insurance company initially pays only the ACV amount after adjusting the claim. This means that after assessing the damage and factoring in depreciation, the insurer issues the first payment based on the ACV value.

However, once repairs or replacements are completed, the policyholder can submit proof of the completed work, such as receipts and invoices, to receive the recoverable depreciation—the amount originally deducted for depreciation. This process ensures that homeowners actually repair or replace the damaged property before receiving the full RCV payout.

• Example of ACV to RCV Payment Process:
  
  1. A fire damages your kitchen, and the cost to replace cabinets, appliances, and flooring is estimated at $20,000.
  2. The insurer applies depreciation, determining the ACV to be $12,000, and issues this amount upfront.

After repairs are completed and proof is submitted, the insurer pays the remaining $8,000 in recoverable depreciation.

Beware: Insurance Companies Don’t Always Play Fair

While ACV and RCV policies are designed to help homeowners recover from losses, insurance companies don’t always do the right thing. Some insurers intentionally over-depreciate property, reducing the ACV payout so they have to pay less upfront. This tactic can leave homeowners struggling to afford necessary repairs and force them to fight for the full amount they are owed.

If you suspect your insurer is unfairly depreciating your claim or delaying your recoverable depreciation payment, Averill & Reaney can help. Our experienced attorneys specialize in holding insurance companies accountable, ensuring you receive the full benefits of your policy. Contact Averill & Reaney today for a free consultation and let us fight for what you deserve.