Replacement Cost vs. Actual Cash Value

[Aram V.]

I heard Brandon on on the BP Podcast mention that he uses cash value policy vs replacement cost policy.  I've read that cash value can be messy. Thoughts?

[Michael Norris]

It’s not that ACV coverage is messy as much as the average person does not understand how claims are handled on an ACV policy and/or what the minimum amount of coverage is required by the carrier on an ACV policy. They just look at cost.
First: What is covered?
ACV polices will list 8 or so types of loss that will be covered by the policy and if it’s not named...it’s NOT covered.
RCV polices are an “all risk” type of policy so it will only list the exceptions that are not covered - as long as the loss isn’t listed as an exception than it will be covered.
It’s complicated and is why some people hate the concept of insurance because they end up learning this stuff as part of filing their first claim.
Next - how would a claim be handled?
Ex: A house with a 15 year old roof sustains enough storm damage requiring it to be replaced and the roof damage is estimated at $20,000 and assume a $1000 Policy deductible.
Replacement Cost - will pay out $20k for the roof minus deductible. Payout = $19,000
ACV - will pay out $20k minus a depreciation factor (probably 50% depreciation on a 15 year old roof) then subtract the deductible.
Payout = $9000
Leaving the property owner paying out of pocket $11,000 to fix the roof.
Big difference right?
Replacement Cost is obviously better but...
On a Replacement Cost Policy you’ll be required to carry the Dwelling Coverage amount something close to the full estimated cost to rebuild the home.
Diff states have vastly different rebuild cost.
In my state it averages around $150 per square foot to rebuild x 1000sqft = $150,000 A replacement Cost Policy would require you to carry $150,000 dwelling coverage.
But it’s Cleveland Ohio and you bought the house for $35,000. It was built in 1910 and may be a little rough around the edges, tougher part of town, etc.
There’s more to it than that but hopefully that helps.
An agent who understands investment properties and what your goals are could break it down a lot more than what I just gave.