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ACV vs RCV Policies: Why Your Roof Isn't Fully Covered

ACV vs RCV insurance polices blog

Why your roof replacement isn't fully covered by your homeowner's insurance

Homeowner insurance policies can be a source of confusion and frustration; however, if you live in a weather-volatile state like Oklahoma, it is a necessary evil. In Oklahoma, your home may suffer damage from wind, hail, tornadoes, wildfires, and many other natural disasters. Imagine your reaction as a homeowner when you experience devastating storm damage at your home and discover that you have an ACV policy and not an RCV policy.

It may come as a shock when receiving a check that doesn’t cover the complete cost of your roof replacement, and you’re responsible for covering the rest. You’ve paid your insurance on time for years, and your policy doesn’t even cover the cost to replace your roof. What gives?

In this article, we’ll explain the difference between a homeowner’s ACV policy and RCV policy. We hope the information in this article will help you to have a better plan in place to help cover your damages in the case of an emergency. You will already have so much to worry about, do you want to worry about coming up with an extra couple thousands of dollars too? Probably not.  

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ACV Policy

An ACV policy, otherwise known as an Actual Cash Value policy is computed by subtracting depreciation from the fair market value of your roof. Depreciation is calculated by establishing the useful life of your roof and determining what percentage of that life remains.

In the case of a roof damaged in a storm, your insurance policy will cover the cost of the roof less the age and wear and tear before the damage. This means more money out of your pocket when it comes times to replace it.

Below is an example of an ACV insurance reimbursement in Oklahoma. Please note that this is only an example used for reference and does not depict any guarantees of payment by the insurer:

  • A claim is filed and it is determined that the fair market value to replace your roof is $10,000.
  • The depreciation value on your roof before the filed claim is $5,000. So your insurance company will subtract $5,000 non-recoverable depreciation from the $10,000 fair market value.
  • You have a $1,000 deductible on your policy. The insurance company will also deduct that amount from your reimbursement check.
  • This will leave you with an ACV reimbursement check of $4,000 to replace your roof.

RCV Policy

An RCV Policy or Replacement Cost Value policy is computed by determining the cost to repair or replace a damaged item at its current fair market value.

In the case of a roof damaged in a storm, your insurance policy will provide you with a payment equal to what is required to replace the roof of your home in its entirity.

Below is an example of an RCV insurance reimbursement in Oklahoma. Please note that this is only an example used for reference and does not depict any guarantees of payment by the insurer:

  • A claim is filed and it is determined that the fair market value to replace your roof is $10,000.
  • The depreciation value on your roof before the filed claim is $5,000. So your insurance company will subtract $5,000 recoverable depreciation from the $10,000 fair market value.
  • You have a $1,000 deductible on your policy. The insurance company will deduct that amount from your reimbursement check.
  • Your insurance will provide you with an ACV reimbursement check of $4,000 to begin the replacement of your roof.
  • After the work is completed and you send in an invoice to your insurance company with proof of performed work, they will issue you another check if incurred up to $5,000 to cover the recoverable depreciation value of your roof claim.
  • After all is said and done, if incurred you will have been reimbursed $9,000 for your roof replacement.

It must be noted, however, that the RCV policy is not required to provide you with compensation to cover what it would cost comply with new building codes. In an article by the Insurance Journal, a ruling in McCorkle v. State Farm Ins. Co. (1990) 221 Cal. App. 3rd 610  determined that the insurance company is required to compensate for the actual loss sustained but not to place the insurer in a better position than before the damage. Your insurance company is expected to make a note of this ruling in its policy as per Insurance Code Section 10103, by including an at least 10 point font line that reads, “THIS POLICY DOES NOT INCLUDE BUILDING CODE UPGRADE COVERAGE.”

Bear in mind that replacement costs can change over time. Make sure to monitor your policy every year and account for any upgrades or improvement you have done to your home. Some policies may provide you with an inflation clause to cover any updates as well as any changes to the cost of labor or materials that can affect the estimated replacement value.

Documenting Lost Value

Your insurance company will most likely require proof on the value of your roof. It will be helpful to make sure you always keep a record of your roof installation invoice, warranty information, and any repairs or maintenance performed on the roof before the insurance claim. The more details and proof that you can provide, to more accurate your insurance company replacement estimates, will be.

Coverage Limitations

Regardless of whether your policy is an ACV or RCV, the amount you get back will be subjected to coverage limitations as determined on your policy. Your home’s value will be used as a base guideline for the maximum reimbursement value.

Thirty Roof Questions Answered CTA

Sit down with your agent to get a better idea of what your current policy entails. Don’t be caught off guard when a disaster hits. If you have an ACV policy, ask your agent if the actual cost value is calculated by fair market value and what considerations are involved.  Be aware of what your maximum reimbursement value is. If you have an RCV policy, find out if it is set up to cover the cost of inflation. Be sure to review your policy whenever you switch homeowner’s insurers and before filing a claim, check your policy to determine if your issue is covered. Don’t let an emergency be the reason you finally become familiar with your policy.