Property insurance policies can be written on a Replacement Cost Valuation (RCV) basis or on an Actual Cost Value (ACV) basis. Replacement Cost Valuation is defined as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation. Conversely, Actual Cash Value entails deducting depreciation, which is the decrease in value of property over a period because of age, wear and tear, or obsolescence, from the replacement cost of the insured property.
ACV vs RCV
The two coverages can mean significantly different payouts in the event of a claim. Consider a roof installed ten years ago for $10,000. Although it may cost $15,000 to replace the roof in today’s dollars, the roof is approximately 40% depreciated in value due to its age in relation to its expected useful ‘lifetime.’ The actual condition of the roof at the time of loss could further depreciate its value. An insured with RCV coverage would receive the $15,000 needed to replace the roof regardless of its condition pre-loss, whereas an insured with ACV coverage would receive $9,000 (RCV less 40%) or less, depending upon the condition prior to the loss.
I have RCV coverage, so why is the insurance company depreciating all my property when I have a claim?
Regardless of whether a building or personal property is damaged, if you have RCV coverage, the insurance carrier is permitted to issue payment on an ACV basis initially. This is called a holdback.
Paying the claim as ACV enables the insured to receive partial payment to begin repairs with insurance funds rather than their own while the holdback is recoverable at a subsequent time.
To obtain the balance of the Replacement Cost, the insured must document that they have repaired or replaced the damaged property. This is usually done by submission of replacement receipts or construction documents to the adjuster and sometimes by an inspection of the repaired property. Only if an insured has incurred the full value of the loss are they entitled to recover the full holdback.
Why is it so much effort to simply get what I’m insured for?
Simply put, the Principle of Indemnity. Insurance is designed to return the insured to the financial condition they were in pre-loss, but not to put them ahead. Under the Principle of Indemnity, one cannot profit from a loss, which would be the case if the insured was paid to replace the property in full but did not do so or paid far less to make repairs than was estimated or paid under their insurance. When the insured documents their full costs borne to effect repairs or replacement, the insurance company can then fairly issue payment to make them whole.
The Principle of Indemnity means that you cannot be compensated twice for the same loss. If there should there be another loss in the future affecting the same property, failure to evidence repairs can lead to a presumption that damage was considered under the first claim and then be excluded under the second. Documentation to recover the holdback is then also proof the repair was made, and any further damage can be considered under the second claim.
Have more questions about RCV, ACV or holdbacks? Contact TSIB today and speak to one of our Risk Advisors. If you have any other insurance questions regarding your commercial property or corporate policy renewal, reach out to TSIB for a free risk review.
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