Actual Cash Value Insurance

[Rick C.]

Hello BP. I am doing a review of the insurance coverage on my rentals in Tampa FL, and I wanted to get a better understanding of what would happen in the case of a full loss. Here is an example of one of the rentals I have:

1000 sq ft Single Family Rental

Frame

Built in 1925

Purchase price: $50k (in 2015)

Market Value: $75k

Replacement Cost: $130k

Insured for: $75k at Actual Cash Value (ACV)

Deductible: $2,500

If a major disaster (such as a hurricane or fire) leveled this house, what amount would I receive as a result?  Would depreciation still need to be calculated?

[Jon Holdman]

Originally posted by @Rick C.:

Thanks for all of your help @Timothy W. and @Derek Lacy. In the event of major repair, such as that scenario of the $30k claim that Derek provided, if the house was insured at Replacement Cost, would all of the claim money need to be used for the repairs or could it be put toward knocking down the house and investing in another location?

I'm not an insurance agent or adjuster but unfortunately have some experience from the claimant side.  How it has worked for me is that the adjuster looks at the damage and comes up with an estimate for the replacement cost.  Then your contractor haggles with the insurance company to get the estimate bumped up.  The theory is that if you find a contractor who will do it for less than the insurance estimate, the insurance company pays based on the contractors estimate.  You don't get to pocket the difference. If the contractor charges more, you pay that.  The reality, in my experience is the contractor does the work for whatever the final estimate that agreed upon with the insurer.

Now, the way its paid is that the replacement cost estimate is split into the cash value portion and the replacement cost portion.  This has nothing to do with any depreciation you've taken on the property and everything to do with the age and lifetime of the damaged items.  If the damaged thing (e.g., roof or siding) has a lifetime of 20 years and is 5 years old, the actual cash value portion will be 75% of the replacement costs estimate.  The insurance company hands you a check for that amount, less your deductible.  Then you get remaining portion when the repairs are actually made.  In my experience, they will actually hand the remaining portion over when you have a signed contract. But you have to have that contract or have the repairs done.

So, even with replacement cost coverage if you do not repair the damage you will not get the replacement portion, only the actual cash value.