Replacement Cost Coverage

Is Replacement Cost Coverage the be all and end all?

There are any number of standard insurance provisions that inspire fear and loathing in homeowners. Deductibles, co-insurance and duties after loss all have the potential for causing teeth gnashing. However, none seem quite as unsettling as the manner in which claims for Replacement Cost Coverage are adjusted.

The insurance industry generally relies on a two step valuation method for calculating the value of a property loss. An adjuster will first determine the Replacement Cost Value (RCV) of the item, which is the cost to replace it at the time of loss. The Actual Cash Value (ACV) of a piece of property is the cost to replace it (RCV), less depreciation. Depreciation is the loss of value suffered by an asset due to the passage of time. An example of depreciation is what happens to the value of a new car as soon as it is sold. A $30,000 car quickly becomes a $25,000 car upon its purchase, its value having been depreciated by $5,000 the moment it became a used car.

Replacement Cost Coverage insures against losses due to depreciation. If I total my new $30,000 car on the way home from the dealership and I have Replacement Cost Coverage, I can recover the $5,000 depreciation in addition to the Actual Cash Value. Sounds good?

Here’s the rub: insurance policies generally only make the depreciation recoverable after the insured has replaced it. Until it has been replaced, the insurance company will not pay more than the Actual Cash Value of the insured property. Continuing the example above, after totaling my new car on the way home from the dealership, I make a claim on my auto insurance policy. The insurance company pays me $25,000. If I then go buy another $30,000 car, and make claim for the depreciation, upon providing my insurance company with proof that I replaced the wrecked vehicle, it will then (and only then) pay me the $5,000 depreciation.

For those insureds who are flush with cash, the way claims for replacement cost coverage are adjusted poses little inconvenience. Conversely, for low-income families devastated by the complete destruction of their homes, the inability to replace the loss may make the depreciation ultimately unrecoverable.  They may never recover the depreciation because they do not have cash on hand to cover the full cost to rebuild and wait for reimbursement, which can be a time consuming process.  However, a resourceful insurance claims lawyer may be able to identify other means of recovery within the policy. Call Turner & Company – Attorney for your free claims evaluation.

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