Need help understanding ACV Landlord insurance

[Ronald Trepton]

Hello BP Community,

I have two rental properties that my insurace provider Allstate will only do ACV policies on. I am told this is because they were built prior to 1941. Replacement policies are easy enough to understand. I also understand ACV in regards to items like for example: Tree falls on 7.5 year old A/C compressor. Unit has a 15 year lifespan so ACV pays 50% minus deductible.   

My confusion comes in when say there is a fire that either destroys a kitchen or worse the entire house. How is depreciation figured then? If the cabinets, walls, windows basically everything other than appliances > 30 years old am I completely out of luck because everything is fully depreciated or do I walk away with the limit specified in the policy minus deductible of course? 

Thank you in advance,

Ron

[John Mocker]

Ronald,

The payout on a claim is determined by the Insurance company adjuster based on the terms of the policy and what happened in the loss.  

Actual Cash Value (ACV) is the Replacement Cost (RC) minus Depreciation.  The sale price of a house includes the value of the buildings and the land.  If you take out the land value, the remaining amount should be an estimate of the depreciated value of the house (ACV).  By subtracting the ACV from the RC you get the amount of depreciation.   The $200,000 property with a land value of $100,000 would give an ACV of $100,000 for the building.   Assuming the cost to rebuild from the foundation up (RC) is $150,000 the house depreciated by 1/3 ($150,000 minus $100,000 = $50,000  50,000/150,000 = 1/3).

One of the problems or disadvantages of ACV is that on a partial loss the claim payment will be reduced by the percentage of depreciation.  In the example above, a $60,000 partial loss will get paid at $40,000.

Check with Independent Agents that represent multiple Insurance carriers and get quotes for policies with Replacment Cost coverage.  The Building limit will probably have to be higher than your current ACV policies but the rates many not be that different and the payout on a partial loss could be higher.   You can also offset the higher rates with higher deductibles as a way to keep the increase down