In North Texas, roofs are most often damaged by hail and wind. Insurance companies are required to pay for these damages, but are always for ways to save money. They do this with Actual Cash Value endorsements. When a claim is filed, the endorsement tells the insurance adjuster how to estimate damages to a property. These endorsements can be your best friend or your worst enemy.
What is actual cash value?
According to Travelers Insurance, the Actual cash value (ACV) is the value of destroyed or damaged items at the time of loss. For example, if your roof has a lifespan of 20 years and it is 10 years old at the time of loss, then the Actual Cash Value is 50% of the original value of the roof. For an ACV policy, 50% of the roof’s value will be kept by the insurance company and not paid to the homeowner. This withheld amount is called depreciation.
What is replacement cost value?
Replacement cost value (RCV) is the value of destroyed or damaged items at the time of loss including depreciation. Unlike the previous ACV example, you do not lose 50% of the value of the roof.
What is a 15 year Actual Cash Value Endorsement?
Insurance companies are tired of paying for old roofs, because older roofs are more easily damaged. The day a roof becomes 15 years old, the damages are estimated as Actual Cash Value instead of Replacement Cost.
For example, the day a 30 year old roof becomes 15 years old, the insurance company keeps 50% of the cost of replacement.
Why are ACV policies a problem for homeowners?
Most homeowners don’t realize this endorsement exists and are surprised when they find out they have it.
Real life example. We inspected a leaking 3-tab composition roof in Boyd, TX and it had signs of wind and hail damage. The insurance company verified the damages and agreed to pay for the roof. The 3-tab roof has a lifespan of 20 years and was 16 years old. Instead of paying full replacement cost, the insurance company depreciated the roof 75%. If the homeowner had filed the claim the previous year, then they would have received full coverage for their roof. Instead, they were given the Actual Cash Value and lost 75% of the coverage.
This is what the endorsement looks like in an insurance policy.
Real life example. A homeowner in Plano, TX had a metal roof. It was damaged during a hail storm and the insurance company agreed to pay for the damages. According to Xactimate, the estimating program, his metal roof had a lifespan of 35 years and was 15 years old at the date of damage. The insurance company kept 40% of the money because of the age of the roof. The homeowner was shocked!
In most cases, the homeowners have to pay out of pocket for the lost costs. One option is to finance the roof replacement with affordable monthly payment plans.
What can homeowners do to avoid ACV policies?
- Add a replacement cost endorsement to the Actual Cash Value policy. The endorsement increases the insurance premium, but gives the homeowner more coverage.
- Make sure the roof is less than 15 years old. Make sure storm damage claims are filed promptly to keep the roof as new as possible.
Insurance policies can be confusing, but homeowners need to understand how the policy is written and how the insurance claims process works.