After experiencing a covered loss, the most pressing question for many insurance policy holders is: How much will the insurance company pay for my claim?
In the context of property insurance, insurance companies pay out through one of two structures: actual cash value or replacement cost value. This blog will cover the key differences between these two compensation methods.
Replacement Cost Value: What is it?
In many respects, replacement cost value is simpler to understand than actual cash value. If your insurance policy indicates that covered losses will be paid out in accordance with their replacement cost value, that means your provider will cover the costs of getting another comparable item to replace your old one.
For instance, let’s say your roof policy requires your insurance provider to cover the replacement cost in a covered loss. If a hurricane causes a large tree to fall on your house and destroy your roof, your provider will likely cover the full cost of installing another roof that was similar to the one you previously had. Policies that pay out replacement cost values typically have more expensive premiums than those that only pay out actual cash values.
Actual Cash Value: What is it?
Property insurance policies with actual cash value payouts compensate policy holders the replacement cost value minus depreciation.
To illustrate this concept, let’s say your TV was destroyed in the same incident as your roof. After filing a claim, the insurance provider confirms that the destruction of your TV is a covered loss. Instead of paying the full cost of replacing your TV, your provider will pay you the fair market value of your TV the day it was destroyed. If you bought the TV seven years ago for $1,800, it might be worth only $400 today. A policy with an actual cash value provision would likely pay you only $400.
While your payout would be higher with the replacement cost value provision, the premiums would have been higher. So, each type of payout comes with tradeoffs. It’s worth considering all options and contingencies before simply purchasing the cheapest property insurance.
Replacement Cost Value Enhancements
Some provisions for replacement cost value cap payouts at 100 percent of the original purchase price. This presents a problem for certain types of insured items and properties. In those cases, purchasing policy enhancements can ensure you would receive an adequate payout in a covered loss. For example, an enhanced replacement cost policy might pay up to 150 percent of the original purchase price or, in other cases, the entire replacement cost (regardless of value). Additionally, policies may have Ordinance and Law Coverage that may also apply to cover the cost of compliance with new building codes.
Contact An Attorney to Help Get What You Are Owed
Insurance policies are confusing. Providers often write the policies that way on purpose, hoping to use the muddied waters to minimize or deny valid claims. While we hope this blog has demystified one aspect of property insurance, it’s still important to contact an experienced insurance attorney to make sure you get what you are owed.
Alvarez Law Group aggressively represents insurance policy holders. If you don’t think your property insurance company is treating you fairly, we want to discuss how we might be able to help. Our team offers free consultations for insurance matters; contact us today to schedule yours.
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