Valuation Battle: ACV vs. RC vs. ERC

Maybe you’ve spoken to your insurance agent and they’ve mentioned some sort of loss valuation, such as actual cash value.  My assumption is you left that discussion thinking, “Great!  My loss will be paid.”  But what does this actually mean? When it comes to loss valuations, there are three common valuations: actual cash value, replacement cost and extended replacement cost.  Let’s break these down…

 

Actual Cash Value

Actual cash value provides the least amount of coverage in most cases.  Actual cash value is replacement cost minus depreciation.  I’ll go into replacement cost in a second, but depreciation is whatever percentage that your items, homes, cars, etc. are said to lose in value each year, just because they’re a year older and their “useful life remaining” is coming to an end.  Thus, if you have items that appreciate in value or don’t lose any value, you may not end up with a settlement that you like. 

 

Let me give you an example – In the type of clients that I work with on a day to day basis, they like their cars.   I have many clients with collector Aston Martins or Ferraris.  The idea of this is that these vehicles appreciate in value and if they hold them for a couple years, they’ll come out with more money than they invested in the car in the first place.  For easy round numbers, let’s say a car was purchased in 2008 for $100,000.  Now, it’s 2014 and there is a total loss because the driver lost control of the car.  In 2014 the car might cost $120,000 to purchase, but because it is now 4 years older there might be a depreciation of $40,000.  Thus, the loss settlement will be $80,000 and you will not be able to replace the car.  Obviously, this is a generic example, but this happens often when it comes to homes.

 

Replacement Cost

Replacement Cost is pretty simple.  The valuation would be what it would cost to replace the item with a similar item today.  There is no “depreciation” taken into account, because the item might be more or less to replace today depending on what it is.

 

Here’s another example for you – I have an iPad that was purchased for $500 in 2010.  In 2013, there is a fire in my home and the iPad is completely damaged.  I find my same iPad purchased in 2010 for $200 because it is three years later and other, newer models have come out.  My insurance company will give me the $300 to replace it.

 

In the example above regarding the high end vehicle, in 2014, the insurance company would likely pay up to $120,000 (depending on how the contract reads) or the limit shown on the policy if it is less than $120,000.

 

Extended Replacement Cost

Extended replacement cost is similar to replacement cost, but it is not capped at the limit shown on the policy.

 

Here’s my last example for you – I purchase a beautiful $500,000 home, my dream home, which I insure for $500,000 with extended replacement cost.  Being on the gulf, we see hurricanes from time to time.  Well, a hurricane sweeps through and takes out my beautiful home.  I’m devastated, but I have extended replacement cost.  What this means is the other costs associated with my home, that didn’t come along with the previous owner such as debris removal, cost of labor increasing, cost of materials increasing (all because most of the other homes in my neighborhood were also destroyed), are now relevant.  So a year and a half and $700,000 later, my home is back standing.  The insurance company paid out that total $700,000 even though my policy only showed $500,000.

 

If we go back to our first example regarding the high valued vehicle, we would be able to add in other costs that go with obtaining the vehicle, even though the replacement cost is set at $120,000.  This would include things like delivery charges, taxes, etc.  So maybe in reality, it costs $135,000 with all those extra costs and this valuation would pay that amount.

 

Not all companies offer extended replacement cost and the ones that do will want to go to your home, or see an appraisal or bill of sale for your item in order to verify their valuation is correct.  But, if your company offers it, it’s definitely the broadest loss valuation.

 

Another challenge for you… Check out your policy, talk to your agent.  The last thing you want is to find out which of these loss valuations your policy uses when you have a loss.  Insurance contract surprises are not good at the time of loss.

Say My Name: Named Insured Status

What's in a name? As it relates to an insurance policy, a lot.

If you're actually to pull out your insurance contract and read the definitions, you'll find a definition for "named insured". This is basically the person named on the policy as the owner. It can be multiple people (usually a husband and wife), a single person or a company (in the case of a commercial policy). 

So, why is it important to make sure the named insured is correct on the policy? A lot of policies limit or even eliminate coverage for non residents. So think about this, a family lives in Texas. The husband has a job transfer that temporarily relocates him to Florida for a year. He moves and his wife and kids continue to live in Texas until he returns. While he is not living in the house, if he is not listed as a named insured on the insurance policy, he could be excluded from liability coverage. This is also true in divorces or separations. If a spouse moves out, there could be a gap in coverage as it relates to liability and property coverage. 

The other place to closely review named insured status is as it relates to vehicles. Who owns the car? What entity owns the car? That is who the named insured should be. So, if you use a company that bundles all the autos in the household into one policy, make sure that the named insured matches the owner on the title of the car and if it doesn't, then you'll probably need to have your agent or broker write a separate policy each of the vehicles owned by separate owners or entitles. 

And finally, what about umbrella or excess liability coverage? The umbrella policy should match the underlying policies. This will insure that coverage will be seamless in the event of a large liability loss. 

In some cases, you will put homes or cars in the name of a trust, LLC or LP. Some carriers will cover this under a personal lines policy, but will list an individual or married couple as the named insureds and the trust, LLC or LP as an additional insured. There is a difference between additional insured and named insured, but that is for another time. What's important in this post is being sure both spouses are listed as the named insured regardless of the additional insureds. 

So, moral of the story? Review your insurance policy. Make sure the owners match up with the named insureds and both spouses are listed. There are special cases where only one spouse will be listed, and your insurance agent or broker can speak to you more about this.