When a major hailstorm or weather event impacts your area and your roof is needing repair or replacement, your first call is probably going to be your insurance company. Sadly, this is the point where many homeowners find out that their insurance coverage may not be enough to cover all of their damage or the cost of repairs needed. It is our hope at Indy Roof Company that by reading this blog, homeowners are inspired to review their insurance policy and check their coverage levels. By being well-prepared, homeowners can avoid a shock when they actually need to put their insurance premiums to good use!
Understanding the Difference
One major component of roofing claims is the cost to do repair or replacements. Contrary to popular opinion, how these costs are calculated are not straightforward. Insurance companies actually have two methods of calculating repair and/or replacement costs. Those methods are known as:
- Actual Cash Value (ACV)
- Replacement Cost Value (RCV)
It is crucial that homeowners understand that both valuation methods are not created equal. Below, we will explain the differences between each and the pros and cons of both methods. The well-educated homeowner is the best-prepared customer. When push comes to shove, the best-prepared homeowner usually walks away from the claims process with a higher level of satisfaction and the least impact to their wallet. The least-prepared homeowner is usually shocked and appalled during the claims process to realize how woefully inadequate their coverage may be. Unfortunately, this realization is often accompanied by a huge impact on their wallets as well. At Indy Roof Company, we believe education is key and that is why we provide educational series such as these for all consumers, whether current, potential, or future consumers. We believe it also helps to keep the roofing industry and insurance companies honest in the process!
An Appreciation for Depreciation
First, think back to your high school or college economics class. Assets are things such as homes, cars, that prized Michael Jordan sports card, etc. Assets have value that can be positive or negative. Assets may or may not hold value over time. That brand new car you just drove off the lot loses value the longer you own it and the more often you drive it. However, that classic car you bought, restored, and held onto for a number of years may increase in value compared to when you first bought it. This increase in value is known as appreciation . The age of the car or damage from an accident may also cause its value to decrease. This loss of value is known as depreciation.
Also, depreciation can be understood as a business or accounting method that applies a formula to the age of an item, its use, and its expected lifespan. It spreads out the cost of the item or asset over a period of time
Typically, real estate increases in value over time. However, the components of a home such as the roof, the materials required for the roof, etc. can depreciate the more time that passes. The above explains the concept in a simplified way because this is a roofing blog, not an accounting blog!
Homeowner insurance policies tend to have two options for claims:
- Actual Cash Value (ACV)
- Replacement Cost Value (RCV)
We will review each option and the pros and cons of each below.
Replacement Cost Value (RCV)
With the replacement cost value (RCV), the homeowner is reimbursed based on the cost of replacing the item. What this means is that your contractor’s estimate for repair or replacement is covered in full (minus your deductible). Suppose your home was impacted by a hailstorm that damaged the roof, gutters, and siding, your contractor’s estimate would include replacement costs for everything. The homeowner would have a claim that includes the full replacement cost for roof, gutters, and siding; minus their deductible.
Actual Cash Value (ACV)
With the Actual Cash Value (ACV), the homeowner is reimbursed based on the appraised value of your roof or property. They are not paying the claim based on the value of a new roof. They are paying the claim based on the value of an older roof. What this means is your contractor’s estimate for repair or replacement is likely only partially covered. The homeowner is responsible for paying their deductible PLUS the difference in the actual cost of all replacement and repairs minus the appraised value of the insurance claim.
Suppose your home was impacted by a hailstorm that damaged the roof, gutters, and siding, your contractor’s estimate would include replacement costs for everything. The insurance company would counter that estimate with an appraised value of the listed items. The insurance company’s appraisal determines what the homeowner actually gets from their claim. The homeowner would have a claim that does NOT include the full replacement cost for roof, gutters, and siding. They would need to pay their deductible PLUS the difference between the insurance claim and the contractor’s estimate.
RCV vs. ACV: Pros and Cons
Actual cash value (ACV) can be deceiving. Even if real estate valuation of your house and property is increasing/appreciating over time, individual components such as your roof, gutter, siding, paint, etc. are depreciating over time due to age, weather exposure, deterioration, and normal wear and tear. Let’s say it costs $30,000 for a brand new roof. That roof is expected to last 30 years. In five years, it might be appraised at $25,000 due to age and depreciation. If you had a hailstorm, and the contractor estimates it’s $40,000 to replace the roof (due to inflation, rising costs of materials, etc). The insurance company would only pay you the $25,000 that the roof is currently appraised at. As an homeowner, you would be responsible for paying your deductible + the $15,000 difference between the claim and the replacement cost.
The same scenario above with a replacement cost value (RCV) insurance policy may see a payout of $40,000 due to the replacement cost of the roof. As an homeowner, you would only be responsible for paying the deductible.
From reading the above, you may be wondering why anyone would have an insurance policy with actual cash value (ACV) versus replacement cost value (RCV). It depends on insurance companies. Replacement cost value policies can be more expensive, especially if you have an older roof. They may also not be needed if you have a newer home and/or a newer roof that is not likely to sustain damage or need repairs anytime soon.
If you have an older roof, insurance companies know that this older roof is likely going to need replacement soon due to its age, deteriorated condition, etc. Therefore, that is going to cost the insurance company more money compared to a homeowner that has a brand new roof that is likely to not need repair or replacement for 20-30 years (unless there’s a severe weather event). Anytime something is projected to cost the insurance company more money or where the insurance company has to assume greater risk, that often translates to higher premiums for consumers.
In such situations, the insurance company may write a quote based on the depreciated condition of the roof and decide to use the actual cash value (ACV) method of valuation. If a homeowner were to want replacement cost value (RCV), this would likely raise the cost of insurance premiums. Homeowners may opt to obtain a lower insurance premium at their own risk.
As the scenario above illustrates, by using the actual cash value (ACV) formula, the insurance company pays you based on your CURRENT value of a roof. If your roof is 20 years old, it is not going to be valued as highly as a roof that is only 2 years old. Likewise, it will not cover the full replacement cost of a brand new roof with new roofing materials.
Likewise, maybe you are a homeowner with a brand new roof that has warranties from the manufacturer and the contractor. In that situation, maybe you don’t want to pay a higher insurance rate, so you opt for the actual cash value (ACV) valuation to lower your overall insurance premiums. You know the likelihood of roofing repair/replacement is low for the next 10-20 years and you have warranties for the first few years.
As you can see, from the homeowner side vs the insurance side, there are pros and cons to using the ACV vs RCV valuation methods. As far as the question about which one is better, it is recommended to get replacement cost value (RCV) whenever possible just for peace of mind and least impact on the homeowners’ wallet. Whatever route the homeowner takes, they should be educated on exactly what they are getting from their insurance company and the implications of the choices made.
I have ACV, Am I Screwed?!
If you have a damaged roof that is in need of repair and replacement and you find yourself in a situation of navigating the claims process and realize a bit too late that your policy only provides actual cash value (ACV), you may be thinking at this point, “Oh great, I’m screwed!” Worry not! Indy Roof Company has been in this business for years and we are familiar with every possible scenario because we’ve seen it all.
There are ways to avoid paying any additional monies out of pocket if you have multiple trades approved on your insurance scope. For example, if your contractor estimate includes roof, gutters, and siding; and your insurance company processes the claim at actual cash value (ACV), you will not get the full replacement value outlined on your contractor’s estimate. However, you are legally allowed to use your actual cash value (ACV) insurance funds to cover the full replacement cost value (RCV) of the roof. Meaning, you can take the gutter and siding money and put that towards the roofing costs. You could end up with the full replacement cost of the roof depending on your situation and what repairs are needed.
Also, Indy Roof Company has extensive experience working with insurance companies and independent appraisals. We aren’t afraid to support the homeowner in appealing their claim and undergoing an independent appraisal process. Even though they may take longer, they are often beneficial to homeowners and result in better claim payouts.
Those appraisals can challenge any insurance estimates that undervalue a repair and increase the claim amount. Yes, even if it’s an actual cash value (ACV) policy. At Indy Roof Company, we complete approximately 500 appraisals each year with a win rate of 95%.
The Best Value in Indianapolis!
The bottom line is, no matter what situation you find yourself in as a homeowner dealing with your insurance company, Indy Roof Company has your back! As the premier roofing company in Indianapolis, our stellar reputation precedes us. We have hundreds of five-star reviews, a robust customer referral program, many repeat customers, and the credentials to back up our reputation. We don’t just talk the talk, we walk the walk. Nobody walks on more roofs in Indianapolis than Indy Roof Company, nobody.