Might anybody venture an estimate on this? . . .
1) a 60 year old house in dated but reasonably good condition is purchased for 75K
2) the insurance agent's system determines that the correct replacement cost value for that square footage in that location is 190K
3) it's insured for 190K, but with Actual Cash Value coverage
What amount might be paid by the insurance company if it was a total loss shortly after it was purchased?
Any opinions would be much appreciated. Thanks.
Thats a very good question without an easy answer. I can give you a generic one and hopefully that is helpful. Because every home has different features, building material quality, and age of materials, (maybe the kitchen was renovated 5 years ago) the value and depreciation can vary greatly.
The rule of thumb I've used for easy ACV calculation is if its a frame home depreciate by 1% per year and if its brick then its .5% per year, up to a max of 50% depreciation. When it comes to ACV its better to be a little over insured than underinsured because if your underinsured you may get penalties on top of depreciation when you dont carry a minimum amount of coverage to satisfy the contract with the insurance company (called coinsurance penalties).
Ok, here it goes. RC is replacement cost and ACV is actual cash value.
RC=190,000, Depreciation for frame=50% (54 years times 1% stop at max 50%), Depreciation for brick=27% (54yrs x .5%)
So then you take the depreciation amount off of the replacement cost for your insured value.
$190,000x50%=$85,000 (This happens to be the depreciation amount and the value because its exactly half)
$190,000x.27%=$51,300 (That is the amount the RC is reduced by so the home should be insured for $138,700)
So if you have a partial claim lets say for $10,000, the depreciation still applies. With a frame home the payout would be $5,000 minus the deductible and a brick home would be $7,300 minus deductible.
Now this is all a best guess at what your ACV could be. A claims adjuster would come through at the time of a claim and depreciate everything according to age and care to determine a value.
All that being said, being insured for RC while the company will only pay ACV means you are probably over-insured. From a claims perspective you will be fine. The problem is you are paying premiums for $190,000 of coverage when the carrier is not going to pay that out when you have a claim.
Hopefully this reply is useful for you.
That's a very thorough and informative reply. Thanks for that. In this case, the construction is frame, so on a 190K policy its ACV is about 85K. A few questions . . .
1) Would the insurance company pay out 85K even though it was purchased for 75K?
2) As the rehab proceeded I presume that the ACV would increase, is that correct?
3) If so, how might the increase in value be calculated in the event of a total loss?
Those questions are specific to the contract you have with the insurance company.
1.) ACV is not related to market value (purchase price). There are companies that will not let you purchase more insurance value than purchase price but still use the ACV rules which could give you penalties on a claim payout for being underinsured. Crazy but true.
2.)ACV values are deteremined by a claims adjuster. If it was me I would keep records of all repairs and upgrades so you can value those at the time of a claim. Also check with the company if you need to increase insurance values when you update the building. Some have a minimum amount you have to be insured (called a coninsurance clause) and your upgrades could push up your value and possibly create penalties.
3.)Companies like Foremost have a what if claims scenario line you can call and they will tell you if the claim would be paid and how much. Hopefully your insurance agent knows ACV and can give you some good guidance on that. Just be aware you do not get more insurance than you paid for and if you dont pay for enough there will be a penalty assessed to the claim payout. If you pay for too much, while there are no penalties, you just paid for more coverage than your are going to get.
Thanks again. You've been very helpful.
What was the premium difference for ACV vs RCV coverage? Might not be big enough to justify the lesser coverage ...
I haven't been able to find many companies that will issue RC on a rehab in PA. In this particular case . . .
190K ACV + 1M Liability Builder's Risk with Erie is $60 per month
150K RC + 1M Liability Builder's Risk with NREIG is $125 per month
If Erie would consider the ACV of the existing house to be at least 75K, the coverages would appear to be similar, because the ACV of any improvements would seem likely to be the same value as RC.