In recent years, the homeowner insurance industry has taken a huge financial impact attributed to catastrophic events. For many homeowners the emotional distress with a damaged home is further compounded by the frustration within the interpretation of damage estimates and the method in which homeowner insurance companies settle claims. To ease the frustration, the homeowner should understand the acronyms and mathematical processes of a homeowner insurance policy settlement payment which will make the recovery process much easier for the homeowner as well as the contractor and insurance company.
In a homeowner’s insurance claim process, an adjuster will inspect the property to assess the damages attributed to the covered peril. Once the damages are inspected, the adjuster will prepare an itemization of recommended repairs including fair market costs based on an adjusting database. Using this survey or database of figures the adjuster establishes a cost for RCV, also known as replacement cost value, for each item involved in repair. This RCV figure is the maximum reimbursable amount provided, by the insurance company, to repair or replace the damaged item with a brand new part or service.
From the RCV, the adjuster will determine the projected age of the damaged items prior to the peril or claim event. Such factors such as length and amount of use and age of the home are included in this calculation. This level of damage is then converted into a percentage value known as depreciation. As a common thought process, the older the home is, the greater the depreciation will be. Within some homeowner insurance policies, the depreciation may be classified as one of two types; recoverable depreciation versus non-recoverable depreciation. Recoverable depreciation is the maximum amount which can be recovered by the homeowner once the repairs, or replacements, are complete. Non-recoverable depreciation is not recoverable at any point in the life of the claim. Items considered recoverable and non-recoverable are defined within the loss settlement provisions of the homeowner’s policy.
Once replacement cost value (RCV) is established, depreciation is subtracted from this figure which nets a new figure known as ACV, Actual Cash Value. Actual Cash Value is the figure that is initially paid to the homeowner, less any applicable policy deductibles. ACV is not considered a final payment as additional payments may be made representing recoverable depreciation but only after the repairs or replacements are complete.
As a general rule, ACV, or actual cash value, is paid for all items in which depreciation is recoverable with the exception of items such as carpeting, household appliances and personal content items. Although these items are considered non-recoverable depreciation products, endorsements can be added to a homeowner’s insurance policy, with an additional premium payment, to insure the value of these items, at the replacement cost value. In other words, with the addition of an endorsement, the actual cash value is initially paid, the depreciation is then recoverable which nets a final payment equal to the replacement cost value originally estimated by the adjuster.
For homeowners the task of recovery after a catastrophic event is emotionally stressful. Understanding the coverage provisions of the homeowner’s policy, including optional endorsements, will ensure a more efficient and accurate processing of the homeowner’s claim.