We often deal with damaged roofs at a property due wind, hail, or some other weather related event. Typically if insurance covers the event then the replacement cost of the roof is paid for by home owner's insurance. However, we recently had an owner that filed a claim on a damaged roof and were only approved to replace the actual damaged shingles, a difference of thousands of dollars to the home owner. When the home owner checked their policy they realized that somewhere along the way their insurance company sent them a notice that they were converting their policy from a "replacement cost" policy to a "cash value" policy (which is their right). They had not read the notice and had no idea. So we asked one of our most trusted insurance agents to explain the difference between the two kinds of policies below. And it goes without saying, but you should go read your policy today!
My name is Michael Cayse and I have been with State Farm Insurance since 2007 and opened my State Farm Agency in Brannon Crossing in 2010. There have been numerous storms over the past few years and with the freezing temperatures we’ve been experiencing it’s a good time to take a minute to review your insurance policy. Whether it’s home insurance, rental home insurance or renters insurance your declarations pages should show your ‘loss settlement option’ or ‘loss settlement provision’. You should either see replacement cost or actual cash value but there is a big difference between how each will pay in a claim.
REPLACEMENT COST vs. CASH VALUE
Replacement cost pays the replacement value up to the limits on your policy minus your deductible in a claim. Actual cash value pays the depreciated value up to the limits on your policy minus your deductible in a claim. If you have a 20-year old roof that has wind or hail damage and your insurance company confirmed full replacement you will be paid what the claim adjuster estimated for the roof minus your deductible. For example, let’s say you have a roof that costs $10,000 to replace and you have a $1,000 deductible. If you have the roof replaced the amount the insurance company will pay is $9,000 if you have replacement cost on your policy. If you have actual cash value the insurance company will depreciate the value of the roof based on the age. Since a 20-year old roof is nearing the end of its life the depreciation would be significant. The $10,000 roof replacement would have your $1,000 deductible and around $3,000 in depreciation based on the age of the roof so you would be paid $6,000. As you can see there is a substantial difference in the claim payouts.
There usually isn’t a huge price difference between having replacement cost on your policy compared to actual cash value. For most it’s easier to pay a little more each month or each year for better coverage than it is to come up with several thousand dollars at once when/if something happens. Your home is likely your biggest physical asset and you want to make sure you have the coverage to best fit your needs. It’s better to know your coverage before something happens than to hope you have what you need after it does!
We’d be happy to help if you have any questions or can be of assistance?
859-272-0264
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