This is the second half of the article “Insurance Riders: Do I Need One” written by our guest insurance blogger, Stephen Hadhazi. Missed the first part? Read it here!
What’s the difference between replacement cost value and actual cash value? Does it really matter what coverage I have on my home owner’s policy? Stephen Hadhazi, a certified public insurance adjuster, tackles the answers to these very questions:
Personal Property Limits
The contents of your home are generally insured for 50% to 75% of the total dwelling limits. If you carry $100,000 of insurance on your home, you may have personal property coverage of $50,000 to $75,000 depending on your policyâ€™s provisions. Is it enough?
Further, depending on the type of replacement coverage you carry, the contents of your home could be dramatically underinsured. There is a huge difference between Replacement Cost Value endorsement which will replace your possessions with brand new, like-kind items and Actual Cash Value, which depreciates the possessions and pays only a fraction of their original cost.
In many cases, however, the term Replacement Cost Value reimbursement can be a slight misnomer both on personal property and structural claims. Nationally, many Replacement Cost Policies state that they will pay only the Actual Cash Value until such time replacement has been completed and you send them proof of the replacement.
Under such circumstances, you should also be aware that reimbursement of the full depreciated amount is also contingent on you spending at least the amount of the replacement cost amount allowed by your insurance company.
For example, you filed a claim for damage to a five year old sofa and your insurance company allowed a Replacement Cost Value (RCV) of $2000. You agree that the average useful life expectancy of the sofa would be ten years. The adjuster then depreciates the sofa at the rate of 50% leaving you an Actual Cash Value (ACV) of $1000.
The adjuster then writes you a check for $1000 and then tells you that you have a certain amount of time, usually 6-12 months, to replace the sofa and file for reimbursement of the $1000 they held back in depreciation under the Replacement Cost benefits of your policy. You then find a suitable replacement couch on sale for $1,500.
You eagerly send in your receipt to your insurance company expecting to receive the $1000 they held back in depreciation. However, youâ€™re also limited by what you actually spent for replacement so instead you get a check from your insurance company for an additional $500 with a thank you note for saving them $500.
Check back tomorrow for the conclusion of Stephen’s article, complete with a list of personal property limits for most policies.