INVESTORS UNDERSTANDING ROOF REPLACEMENT COST VS. ACTUAL CASH VALUE

Posted By: Eve Hoelzel ICOR Blog & News ,

As a fourteen-year award-winning insurance agency specializing in Business Insurance and Investors, I have met with many property investors to explain the importance of having the proper roof coverage on your home insurance policy and rental properties.  I recently reviewed a policy for a prominent property investor to find the cost savings because the current policy had a large depreciation schedule built into the insurance policy.   In an active hail state like Colorado, investors must understand the importance of having the correct roof coverage on their insurance policy.  

According to the NICB (National Insurance Crime Bureau) report, from 2017-2019, Colorado is ranked #2 in the United States for hail claims.  In our state, we can count on having a hail claim every five years. Knowing that this state has such an enormous propensity for hail and severe weather, I found it essential to share my experience and knowledge with you.   

Let's start with the importance of Replacement Cost vs. Actual Cash Value for the roof of your property.   Replacement Cost is a type of coverage that replaces the current roof with a new roof without depreciation deduction.  This means that the current roof, no matter how old, will be replaced with a new roof minus the deductible within the policy.  This option represents the most preferred coverage properties should have in a policy.  Actual Cash Value is a type of coverage that pays for a roof's depreciated value, minus the deductible.  This can cause many problems for investors/ insureds as the depreciated value can be a judgment call by the claims representative or a fixed schedule within the policy form. Let's look at an example below to help show the difference in a claim settlement based on a 10-year-old roof. 

Replacement Cost Coverage

Damage Amount

Deductible

Final Claim Payment to insured after recoverable depreciation

Roof Replacement

$20,000

-$2,500

= $17,500

Actual Cash Value Coverage

Damage Amount

Depreciation applied to claim 

Deductible

Final Claim Payment to insured  

Roof Replacement

$20,000

-$7,500

-$2,500

= $10,000

In the above example, the difference on one hail loss/claim would be an additional $7,500 out of pocket expense to the property owner.  If the insured is aware of the depreciation deduction for hail losses, it should be included in their annual budget.

When I review policies with the Actual Cash Value endorsement, I also give my clients an insurance estimate of what it would be if the policy had the Replacement Cost Coverage.  Often the difference is minimum compared with the depreciation deduction.

Feel free to contact me to review your policies and coverages to ensure your investment properties are adequately protected.   Understanding your policy and how claims will be handled is probably the most essential part of your insurance policy.   Let me assist you with that process.      

References:  http://www.rmiia.org/downloads/2017-2019HailForeCAST.pdf  Page 4 chart of largest hailstorms by state