Insuring You're Ready (Part One): The ACV vs. RC Dilemma
Navigating between a restoration company and your insurance carrier sounds like a daunting task, but it doesn’t have to be. Being proactive and knowledgeable in what your insurance policy carries, and what your financial burden will be, is a great step to take in surfing through the choppy waves on an insurance claim.
Insurance Companies and a Restoration Company, like SERVPRO of Northeast Wichita, might seem like they do not have much in common. One thing they do share, and I’m sure we all agree, is they both offer service that no one wants to use. Using your insurance or SERVPRO means that something aggravating or devastating has happened to your home or business. Nothing agitates that more than assuming you had the right coverage for the loss, and finding out you are going to take on all the financial cost.
Through the upcoming weeks, SERVPRO of Northeast Wichita will be posting a series of blogs tailored towards your insurance coverage and how that pertains to a restoration claim like a fire, or water loss. The intent of these blogs is to give broad advice and guidance pertaining to insurance and understanding what that would mean for you in the event of an unexpected loss. As I’ll mention throughout this blog, you should always contact your insurance agent and carrier and ask important questions regarding your coverage and always ask for their responses in writing on a letterhead.
Who am I?
My name is Patrick Thorpe, and I have recently begun my career with SERVPRO of Northeast Wichita. Before coming on board with this wonderful company and team, I spent the better part of a decade helping folks just like you with their insurance coverage. The one aspect of that job I enjoyed the most was being knowledgeable, educating my clients, and, pun intended, insuring that they had the right coverage so that I could be their personal Superhero when an emergency arose. Now that I’m on the other side of the table, working with SERVPRO of Northeast Wichita, it’s important that I impart with what I learned in the insurance industry to make sure when our services are needed, you have the proper coverage to help with that financial burden.
Folks, it truly is a burden. None of us wake up in the morning and think that this will be the day my kitchen catches fire, or the pipe behind my refrigerator leaks and ruins the hardwood floors. The vast majority of people I have helped with claims were so thankful they had the proper coverage, because they were not financially prepared to pay for $15,000 or $100,000 worth of repairs.
Now that my short introduction is through, let’s get to work, shall we?
Losses come in many forms, whether that’s a roof leak from a bad hail/thunderstorm, a leaky pipe, fire in the kitchen, complication with the sewer systems or rainwater entering in from a basement window. Each of those losses are unique and require a different “ground game”, both as the owner of a house or building, but also for a company like SERVPRO of Northeast Wichita. However, all of those losses have something in common and is your first step in mitigating a hefty financial loss. I’ll refer to this commonality as the Actual Cash Value (ACV) vs. Replacement Cost (RC) dilemma.
ACV vs. RC
The simplest way to describe the Actual Cash Value (ACV) is to think about your vehicle. We can all agree that as your car ages and miles accumulate the value of your car decreases. The only way to add value back to your vehicle is to repair and replace worn mechanical and cosmetic features of your car, like the engine or interior. Even with those updates, very rarely do you bring back the entire value of your car when first purchased.
If you have ever had a total loss (like in a hail loss or a t-bone accident) you should be familiar with ACV. More often than not, you’re only offered the value of your car in the market, and not what you had actually paid for the car. Now, let’s transition that to your house. Let’s say you have a 10 year old house. Regardless of the price you paid for the house the cost to replace drywall is the same. Picture in your mind a brand new piece of drywall side-by-side with a piece of drywall that is ten years old. The new piece of drywall with new paint compared to the old drywall that remains will be much different due to normal wear and tear of living in a house (handprints, scratches, smudges). Ask yourself this question: Would you pay the same amount for the old piece of drywall versus the new piece of drywall? The answer should be unanimous: NO! You would pay less, right? This is how ACV works inside your home or business.
ACV might apply to the structure (i.e. roof, walls, cabinets), to personal property (i.e. laptops, beds, tools) or both. If you’d like to research yourself, look at your declarations page (usually the first page of a renewal showing your coverage) and scan for anything that states Actual Cash Value. If you find anything on that declarations page that states Actual Cash Value, more likely than not, some if not all of your structure and personal property would fall under ACV. Next, flip that page and look under “Forms and Endorsements” for the same. If you find anything stating Actual Cash Value, than more likely than not SOMETHING under your policy is paid by ACV (the most common would be your fence). The most effective way of finding out if you have ACV on your policy is to call your insurance agent and ask him that exact question. Whatever the answer, always request their response in writing on letterhead.
Replacement Cost (RC) is a bit easier to describe and in discovery. The name states what it does; it entitles you to the full replacement cost of what is damaged. As we all know when it comes to insurance, there are always subtle nuisances. RC is no different. RC can be paid out in different forms, whether it’s paid by with similar construction cost (how your property was before the incident), common construction cost (how properties are built commonly in your area), stated (what you have said is the value of your property), or in other forms not as common as the ones described. Regardless of what kind of RC you have, you can rest easy knowing that after your deductible, your insurance carrier should pay the remaining balance of the repair or replacement. The discovery process of finding out if you have RC follows the same pattern as ACV. Your declarations page will have verbiage such as “Replacement Cost” or “Limited Replacement Cost” (no worries, Limited only refers to the TOTAL AMOUNT you have insured your structure and personal property, as well as certain cost limits like for Jewelry and Firearms). As recommended before, if you’re unsure, call your agent and ask if you have Replacement Cost and whatever answers are given, request it be in writing on their letterhead.
Why is this Important
Whether you have ACV vs. RC coverage isn’t as important as knowing your pocket book will be able to weather the financial cost storm. Having ACV coverage does not indicate you have a “bad” insurance policy. Having RC does not mean you have a “good” insurance policy. Both of these types of policies fill a need. What you should ask is “how much financial risk can I take on if the unexpected happened”, like a sudden pipe burst or electrical fire. RC implies that after your deductible, you should not have any other financial burden. Whether the deductible is $1000, or $5000, that is your portion of the financial cost. ACV means you have decided that you can bore the cost of an unexpected loss, whether the additional burden after the deductible is $5000, $10,000 or more, and in return you receive a lower premium.
What matters is KNOWING the coverage you have, planning for an unexpected loss and being able to react to sudden losses to reduce the total amount of damage utilizing an Emergency Ready Plan. If you are a commercial business, SERVPRO of Northeast Wichita will help you set up your Emergency Ready Plan (ERP) as a free service to our community. What you need to ask yourself is what part of your savings would you be willing to give up if the unexpected happened? Am I living paycheck-to-paycheck? What feeling do I get knowing I have a flat $1,000 deductible to pay versus and fluctuating out of pocket expense?
If you can only give up a fixed, small amount than I would recommend having a Replacement Cost policy. If the answer is a larger, fluid amount, than perhaps an Actual Cash value policy is what’s best for you.
Example: You have a leaking pipe behind the wall in your bathroom. A contractor hands you an estimate of $12,000 to fix the leaking pipe, replace warped floors and wood, replace damaged drywall, paint and clean up. Your deductible is $1,000.
ACV policy: Deprecates for the age of the pipe, floors, wood, drywall and paint ($6,000). After your deductible of $1,000, the insurance policy pays you $5,000.
Your out of pocket expense: $7,000
RC policy: Initially subtracts the deprecation ($6,000) and deductible, issuing a check for $5,000. Once the work is completed, they cut an additional check for $6,000 (the depreciation) paid to SERVPRO of Northeast Wichita or the policy owner (whichever is preferred).
Your out of pocket expense: $1,000
Regardless of your answer, you ought to talk to your insurance agent, find out what options are available, know what your policy will and won’t cover and let SERVPRO of Northeast Wichita help you with your ERP and to recover from the unexpected.
ACV vs. RC does not have to be a dilemma. Knowing your coverage fits your individual need is one of the most important factors in preventing an aggravation turning into a devastating financial burden for you, your family and your business.
SERVPRO of Northeast Wichita sincerely hopes you will never need our services. We also hope that you utilize our advice and implement an ERP for your business, provided by us as a free service to the community. But if the unexpected incident should arise, keep SERVPRO of Northeast Wichita in mind and let us be your Superhero in your time of need and crisis.