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ACV Vs. RCV and why you should care

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Tim W. Donor

Inspector from Tampa, FL

Mar 02 '08, 12:25 PM
7 votes


When you file a claim, you will receive an estimate from the claims adjuster of your carrier to bring the property back to the condition it was previous to the loss. You will also receive an estimate to return lost items to you in the condition they were before the loss as well.

This is the " standard" of insurance practices. Within this, there are two methods of compensating you to bring you to a " pre-loss condition" . One is to pay you Replacement Cost Value (RCV) and the second is to pay you Actual Cash Value (ACV). What's the difference between the two? A nasty little insurance word called depreciation.

Almost everything loses value over time. We take advantage of this when we depreciate property at tax time. It also comes to bite us when we file a claim and the insurance company takes advantage of this. Though the " real estate" itself may actually appreciate - the building components used to construct the building are deteriorating from age and thus lose value a.k.a. depreciate. The same thing happens to contents within the building - for landlords this is mostly appliances.

When your adjuster comes out to settle your claim, they will prepare an estimate of damages and an estimate of value of your contents, then deduct your deductible and deduct the value of depreciation. Depreciation value is often determined by the Property Loss Research Bureau - a third party organization that performs all research related to insurance claims and loss. Typically insurance companies follow their standards.

Here's where the important part comes in. If you have an ACV policy, you get your check and that's it. Once depreciation is deducted and you get the actual cash value the claim is settled. You have to come up with the actual amount to do repairs on the property and replace contents. This can be hard as in my experience when I was adjusting - many landlords often have older properties because they often cashflow better than the newer ones. Also, you would be surprised how quickly some contents items depreciate in value.... This leads to greater depreciation and thus a greater amount of cash the investor has to come up with out of pocket to do repairs or replace contents.

However, if you have an RCV policy - you're in a much stronger position. In an RCV policy, you typically get your actual cash value check when the adjuster first comes out....then you get another check that covers the difference between ACV and RCV after your contractor completes repairs on the property. I have seen RCV checks in excess of $20,000.00 so this is not something to take lightly.

That being said, most landlord policies I have seen are RCV on the actual building and ACV on contents, outbuildings (including detached garages) and fences. This seems to be the best compromise of coverage and cost of insurance for most investors as they can get the RCV coverage on what's most important and contents are more easily replaced at a lower cost. However, there are occasional insurance policies out there that are ACV on buildings. Consider this a warning of what could happen should you have this kind of policy and suffer a catastrophic loss to your building.

Tim


Edited Jun 26 2010, 04:48


Mark N.A

Real Estate Investor from North Carolina

Nov 30 '09, 08:47 PM


Great post, Tim.

I just had a couple two-hour meetings with a new agent to review my coverage.

After listening to him yak about his products and all the choices I had I held up my hand and told him:

"I'm in the rental business. If something catastrophic happens to my property I want it built back the way it was, with the rent still coming in."

I'm 'assuming' he got it right but will review the policies.

And on one's personal residence, Tim, what do you recommend for making a record of my personal inventory/contents? I've been standing in the middle of the room with a video camera and slowly twirling around -- is that good enough?

Thanks - Mark


Edited Jun 26 2010, 10:41


Tim W. Donor

Inspector from Tampa, FL

Nov 30 '09, 10:32 PM
1 vote


Hi Mark,
Just ask him for a replacement cost policy with loss of rent coverage. That will take care of what you need. May even want to e-mail that to him and keep a hard copy in your files that you specifically requested this.

As to your personal belongings, as an adjuster if you have a loss I'm going to ask you for an itemized list of items detailing the items' names, ages (depreciation), place purchased and value at - least that, maybe more. That's an undertaking for most folks once they realize just how much stuff they have. It's really up to you if you want to do it now or at the time of a loss.

The only reason to take pictures is to establish proof of ownership. The only time you'd need that is in a major fire that completely incinerates everything you own beyond recognition. I've had one fire that truly got to that level for half an apartment and the only thing it incinerated was the insured's clothes and some minor electronics. I've yet to see big ticket items completely incinerated (does happen). If you have any wall art I'd definitely photograph it as it's made of flammable materials.

Be aware of your limits of insurance on some items. For example if you hold gold/silver bullion it usually has a limit of insurance, i.e. $1,000.00 - which means no matter how much is lost the max insurance will pay out is $1,000.00.


Edited Jun 26 2010, 10:41 by Tim W.


Mark N.A

Real Estate Investor from North Carolina

Dec 01 '09, 12:03 AM


>>as an adjuster if you have a loss I'm going to ask you for an itemized list of items detailing the items' names, ages (depreciation), place purchased and value at - least that, maybe more<<

Ai yi yi! I don't think most people realize how much STUFF they own! And how long it will take to itemize it with all the pertinent info!!!


Edited Jun 26 2010, 10:41


Steve Babiak

Real Estate Investor from Audubon, Pennsylvania

Dec 01 '09, 03:19 AM


Tim,

What about "law and ordinance" / "code upgrade" coverage - what would you recommend in regards to this?


Edited Jun 26 2010, 10:42


Steve Babiak, Redeeming Properties, LLC
Telephone: 6109082183
...


Tim W. Donor

Inspector from Tampa, FL

Dec 02 '09, 01:15 PM


Originally posted by NC Mark:
>>as an adjuster if you have a loss I'm going to ask you for an itemized list of items detailing the items' names, ages (depreciation), place purchased and value at - least that, maybe more<<

Ai yi yi! I don't think most people realize how much STUFF they own! And how long it will take to itemize it with all the pertinent info!!!


Yeah, it sucks. One summer I spent 4 hours in someone's backyard itemizing their 70s era vinyl 45s that were damaged in a water loss. I should have pocketed some of those Jackson 5s. Probably worth something now.

A colleague had to itemize a porn collection that would rival the library of congress.....and yes he had to itemize by title. Interesting reading afterwards....


Edited Jun 26 2010, 10:43 by Tim W.


Tim W. Donor

Inspector from Tampa, FL

Dec 02 '09, 01:17 PM


Originally posted by Steve Babiak:
Tim,

What about "law and ordinance" / "code upgrade" coverage - what would you recommend in regards to this?


In Illinois and Indiana homeowners residential policies I've read code upgrades are covered as standard coverage (mandated by OBRE and Department of Insurance I believe). I don't know if this is consistent on landlord and commercial policies. If you have a copy of your policy you can e-mail it to me and I'll take a look.


Edited Jun 26 2010, 10:43


Tim W. Donor

Inspector from Tampa, FL

Dec 02 '09, 01:18 PM


Revisiting the post on itemizing everything you own - you need to be aware of your limits of insurance on your contents. If your contents losses hit your limit of insurance it doesn't matter how long your list is anymore. You've hit your limit.


Edited Jun 26 2010, 10:43 by Tim W.


Mark N.A

Real Estate Investor from North Carolina

Dec 02 '09, 08:50 PM


>>A colleague had to itemize a porn collection that would rival the library of congress.....and yes he had to itemize by title. Interesting reading afterwards....<<

One can INSURE a PORN COLLECTION??? I have some, er, acquaintances that will find that of interest......


Edited Jun 26 2010, 10:43


Dave T

Real Estate Investor from South Carolina

Dec 05 '09, 11:21 AM


So, to summarize what you are saying ...

A claim under a replacement cost value policy and a claim under an actual cash value policy both start at the same place -- the replacement cost of the property.
The ACV calculation reduces the replacement cost by the perceived depreciation of the property that was destroyed or lost.

The result of the calculations less the deductible is what is paid to the named insured up to the limit of coverage under the policy.

Does that about sum it up?


Edited Jun 26 2010, 10:44 by Dave T


Tim W. Donor

Inspector from Tampa, FL

Dec 09 '09, 02:57 AM


Originally posted by Dave T:
The ACV calculation reduces the replacement cost by the perceived depreciation of the property that was destroyed or lost.

The result of the calculations less the deductible is what is paid to the named insured up to the limit of coverage under the policy.

Does that about sum it up?


Yes except for one element. The depreciation is not perceived. It's calculated based on age. Here's one commonly used age depreciation calculator: http://www.claimspages.com/tools/depreciation.asp


Edited Jun 26 2010, 10:47


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