When you file a claim, you will receive an estimate from the claims adjuster of your carrier to bring the property back to its condition previous to the loss. You will also receive an estimate to return lost items to you in their previous condition.
Within this standard of insurance practices, two methods of compensation will bring you to a "pre-loss condition." The first method will pay you the Replacement Cost Value (RCV) and the second will pay you the Actual Cash Value (ACV). What's the difference between the two? A nasty little insurance word called "depreciation".
Almost everything loses value over time. We take advantage of this loss when we depreciate property at tax time. Depreciation can also come to bite us when we file an insurance claim. Though the "real estate" itself may actually appreciate, the building components deteriorate over time and thus lose value. The contents within the building also lose value - for landlords the contents consist primarily of appliances.
When your adjusters come to settle your claim, they will prepare an estimate of damages and an estimate of value of your contents, then deduct your deductible and the value of depreciation. Typically, insurance companies determine depreciation by the standards of the Property Loss Research Bureau, a third party organization that performs all research related to insurance claims and loss.
Here's the important part. If you carry an ACV policy, you receive only one check. The insurance company determines the replacement value of your property, then deducts your deductible and depreciation. You receive a check for the cash value and the claim is settled. You then have to come up with the actual amount to repair the property and replace the contents. This could be challenging if you own older properties which often cash flow better than the newer ones. Also, you might be surprised at how quickly some items depreciate in value, all leading to a large amount of cash you have to take out of your own pocket to complete repairs and replace contents.
However, if you own an RCV policy, you're in a much stronger position. With an RCV policy, you typically receive your actual cash value check when the adjuster first comes out, then you receive another check that covers the difference between ACV and RCV after your contractor completes the repairs on the property. I have seen RCV checks in excess of $20,000.00, so please consider seriously the difference between the two policies!
Most landlord policies consist of RCV on the actual building and ACV on the contents, outbuildings (including detached garages) and fences. This seems to be the best compromise of coverage and cost of insurance for most investors as they will receive the RCV coverage on their most valuable property and can replace contents at a much lower cost. However, some insurance policies consist of only ACV on buildings, a potentially catastrophic move for an investor. Remember that the difference between RCV and ARV policies could be as high as $20,000! Check your insurance policy to make sure you carry sufficient coverage for your most valuable property - the buildings.
