With the recent storms we have been handling a lot of questions about storm repair and insurance claims. I wanted to explain some of the terminology that you will find in your insurance packet for you to better understand what they are covering, as well as give an example of how the process works.
There are two types of policies:
Replacement Cost Value or RCV: This is the type of policy you want as it will pay out what it actually costs to replace the damage. This is what your roof is worth brand new.
Actual Cash Value or ACV: This type of policy only covers the value of something at the time it is damaged. This is RCV-Depreciation. This is what your roof is worth today.
Two common terms used in your insurance packet that correlate with RCV and ACV:
Depreciation: The lessening in value of an item/asset due to time, as well as wear and tear.
Deductible: A dollar amount to be paid by the policy holder (you, the homeowner) before the insurance company will pay the claim. This is often just taken out of the amount they are paying for the claim.
Example: Your roof has a $10,000 Replacement Cost Value, or RCV. It has hail damage and the insurance company is going to pay for a new roof. The roof has a 30 year shingle and is 15 years old, so they depreciate it by 50%. They do this because half of the roofs life has been used. This depreciation is recoverable upon completion in most cases.
Once the insurance company decides it is going to pay for a new roof, they release the Actual Cash Value, or ACV, amount-minus your deductible (this is what your roof is worth today). They keep your deductible up front so you don’t have to pay in to them and they guarantee that they get paid. In this case the Actual Cash Value is $5,000 (Half of your roof was depreicated-10,000/2=5000) and your deductible is $1,000. The check you receive up front is for $4,000. If you have an ACV Policy this is all that you will receive-The additional $6,000 to replace your roof will have to come out of pocket, which is why you want an RCV policy since your roof costs $10,000!
Assuming you have a RCV policy (very few people have ACV policies) you now select a contractor to do the work, who you pay $5,000 upon signing a contract (the $4,000 released ACV and your $1,000 deductible). You do not need to get bids as the contractor will do it for what insurance is paying out**. If it is not enough for the contractor to do the job the contractor will submit a “supplement request” asking the insurance company to pay more based on job costs and local labor rates.
Once the work is completed the contractor will submit an invoice showing that the work was done for a total of $10,000 to the insurance company. The insurance company will release the final $5,000, which is known as Recoverable Depreciation. You pay this $5,000 to the contractor and the process is complete.
**If you want to meet with multiple contractors to find one you like that is perfectly fine, but finding one to do the job for less than insurance is paying will not save you any money. You pay the deductible to have your roof replaced. If a contractor does the job for less, say $8,000, the insurance company will only release $3,000 upon receipt of the completion invoice for $8,000.