You may have heard it’s important to insure your rental property for its full value. This is good advice that can ensure you have sufficient coverage if you ever need to file a claim. However, property owners often neglect to check whether their landlord insurance policy provides actual cash value vs replacement value coverage, which could result in vastly different claims payouts.
What’s the difference between replacement cost and actual cash value?
Actual Cash (or Cost) Value (ACV) accounts for an asset's depreciation, offering reimbursement based on its current market value, but deducting for wear and tear. RCV (Replacement Cost Value) on the other hand provides coverage for replacing the asset with a new one, without factoring in depreciation.
For example, let’s say your roof was badly damaged in a windstorm, leaving you with no other option than fully replacing the roof. The cost of the new roof is $18,000. If you insured the roof for ACV, the insurer will deduct the depreciation value. The depreciation amount will vary according to its age, material, upkeep and other factors, but let's say your insurer estimates it to be $3,800. You also have a deductible of $2,000. In this scenario, your total payout is $12,200.
If you insured for replacement cost value, your insurer would only subtract the deductible, leaving you with a payout of $16,000.
Should you insure for replacement cost or actual cash value?
If you own a well maintained property that shows a pride of ownership, you propbably to make sure you enough insurance coverage to be able to rebuild after a loss. In this case, you need to insure for replacement cost value.
Buying insurance coverage that uses actual cash value can be less expensive, but that’s because you’re receiving less coverage. In the event of a total loss, you might not be able to rebuild your property with an actual cash value. That being said, if it's a low value Class C or D property, you might not want to rebuild the property, you prefer to sell the lot and use the payout on a different investment. In this case, you are better off insuring for actual cash value as it could potentially save you hundreds of dollars on insurance costs yearly.