Did your basement flood and soak your couch? Did your rear bumper join the backseat in a fender-bender?
If you have insurance, repairing the damage won’t break your bank account. However, the amount of your reimbursement will depend on whether the insurance company calculates its payouts based on actual cash value or replacement cost value.
What is an actual cash value policy – and how can you protect yourself from getting shorted on payout day?
Actual Cash Value vs. Replacement Cost
Actual cash value (ACV) involves an insurance adjuster subtracting any potential depreciation from the damaged property. The adjuster will determine depreciation based on the age, type and pre-damage condition of the property and may conduct a visual examination.
Another common policy option is replacement cost, which reimburses the amount of money it would take to buy a new product of similar value. Replacement cost benefits consumers because the payout policy is typically more generous than the actual cash value method. This comparative payout generosity means that premium payments for replacement cost plans cost more than actual cash value plans.
Here’s an example of how the different policies reimburse losses.
Your 10-year-old refrigerator was damaged during a storm. A new, similar refrigerator would cost $2,500. How would each type of policy reimburse you?
- Replacement cost value would either pay the $2,500 outright or pay the depreciation value and refund the difference once you send in the purchase receipt.
- Actual cash value would use the depreciation amount. Using the Claim Pages Depreciation Calculator for a ballpark figure, the insurer could start the payout offer at around $830.
The Claim Pages calculator can provide a general depreciation estimate, but the actual depreciation process is more complicated and varied.
How is ACV Depreciation Calculated?
The ACV depreciation process can vary among insurers and locations. The insurance adjusters may factor in the age, type, and pre-damage condition of the property for the calculation or use the even less defined metric of fair market value. Fair market value means the amount the product could sell for today. The method used can depend on the specific policy or on your state’s law regarding insurance depreciation calculations.
Either method allows insurance adjusters to overestimate the depreciation. You have the right to negotiate with the insurance company on the depreciation amount. How can you recognize a fair reimbursement offer?
Ideally, when you signed up for the insurance policy, you also completed a home inventory list that paired each item name with its age and current condition. That would cut down on research time, but negotiations can still happen without that list. Use the Claims Page calculator or the Kelley Blue Book for vehicles to help figure out a general fair price offer for your deduction. Negotiations are always worth a try because the depreciation can’t be changed once the payout process completes.
Vehicle GAP Coverage Negates Depreciation
A Guaranteed Auto Protection policy can help you work around the ACV depreciation after suffering vehicle damage. GAP is a supplementary policy that steps in to cover the difference between the deducted asset value and the amount of the car loan. Auto insurers often subtract both the depreciation and deductible from the ACV, so the GAP payment can also end up covering the deductible.
Always Read Your Policy
Read your insurance policy carefully to understand how the company will reimburse damages. This is especially important for replacement cost plans where depreciation subtractions can happen and catch you by surprise if you didn’t see that devil in the details. The policy will also spell out pertinent maximum payout limits or plan deductibles that can combine with actual cash value to make your reimbursement lower than you expected.
Insurance illustration via Shutterstock.