ACV and RCV Policy Differences
Understanding how ACV and RCV coverage works, and knowing what you have, can be a huge difference maker for you and your family.
What Are the Most Basic Differences Between ACV and RCV Homeowner’s Coverage?
At the most basic level, ACV stands for Actual Cash Value, while RCV stands for Replacement Cost Value. While an ACV policy might be more affordable in the short run, a homeowner’s policy with an RCV endorsement (upgrade) will likely far outweigh the total coverage capacity of an Actual Cash Value policy.
Why does an RCV policy offer more coverage than ACV? Simple. Depreciation costs.
ACV policies limit the risks for the insurance company and reduce the maximum amount the insurance company is obligated to spend towards replacing your roof by depreciating the value due to the roof’s age. When you buy a new home or have a recently replaced roof this could seem reasonable at the beginning of the policy period, but soon the amount available to replace your roof becomes insufficient as the actual value of the roof depreciates over time.
RCV policy endorsements do a better job of putting the interests of the homeowner first by guaranteeing full, like-new, replacement regardless of the age of the roof when disaster strikes. (There is usually a maximum lifetime total limit to how much the insurance company is liable to cover—most often no more than the appraised value of your home.)
ACV vs RCV Scenarios – Which Coverage Is Better for Your Family?
Let’s say that two neighbors moved into identical new homes in 2005 with roofs guaranteed for 30 years. They both purchased homeowner’s insurance from the same insurance company. Fifteen years later, a tornado ripped the roof off both houses in 2020, and they are each facing $20,000 in roof replacement costs.
The first neighbor saw a way to save 10-20% every year by purchasing a homeowner’s insurance policy using the Actual Cost Value (ACV) valuation method. Just for simplicity sake, let’s say they spend $600 on their yearly homeowner’s premiums.
The 2nd family understood the long-term value of an insurance policy with a Replacement Cost Value (RCV) endorsement and were willing to pay an additional 20% every year for their policy to take advantage of significantly better results in the case of a catastrophe. Their hypothetical policy costs $720 per year with full roof replacement included.
The ACV policy holders would have saved around $1,800 or so in yearly policy costs. But when the insurance companies started their valuation process, they would be up the creek without a paddle. Depreciation costs over 15 years on a roof with a 30-year lifespan would be 50% or more. When you subtract that amount from the originally estimated costs ($20,000), you’re only sitting on $10,000 of roof replacement money. Subtract the deductible, and you’re down to around only $9,000 from the insurance company.
But the RCV policy holders would have quite a different outcome, due completely to the fact that their policy calls for Replacement Cash Valuation. It ignores any depreciation costs for replacing the roof. Their policy covers the entire $20,000 cost of replacing their home roof, minus the deductible, of course. So even with a $1k deductible, the RCV family has $19,000 in hand to replace their home roof. You could definitely say that a $19k payout is better than $9,000 payout, and well worth the extra $1,800 in policy premium costs over the span of 15 years.