My insurance agent is being less than forthcoming when it comes to info on homeowners insurance options. I'm trying to compare RC to ACV and she won't give me all of the options. The company has placed too high a value on my property (in an RC policy), and the main question that she now refuses to answer is "what is the payout in the event of a total loss?" Not only will she not give me a figure, she says that the insurance company will not give you anything unless you rebuild. I feel she is not being truthful. I've seen discussions where owners have taken the proceeds from a loss and purchased other properties instead of rebuilding. What is everyone experience with this problem? In an ACV policy, is the payout supposed to be the limit of insurance listed on the policy? Please help!
We write with many markets. Most of the better rates are from companies that write the Building coverage on a "Replacement Cost" (RC) basis. It is a better coverage for the policy holder than "Actual Cash Value" (ACV). A policy based on ACV will normally have a lower limit (ACV = RC minus depreciation). RC is the cost to rebuild the structure with the same kind and quality. In a market where rents are depressed, the RC will often be significantly higher than the ACV.
The problem with ACV is that, on a partial loss, the claim, under an ACV basis, has a deduction for depreciation. You will have to kick in for the deductible and the depreciation. If your Rental is in good shape, updated systems, well maintained, etc. the rates from some companies with only RC may be equivilant to others that will only do ACV. I just wrote one in CT that one of our carriers for $400,000 RC was $100 less than the next best rate which was based on $110,000 ACV for the same property.
The second item that was confusing is what the payout will be. Most policies (homeowners or dwelling/fire policies) that include RC contractually require you to rebuild in order to get the Replacement Cost. The initial payment will be for the ACV and then after you rebuild they will pay the remainder. If you chose not to rebuild you do not get more than the ACV. The reason for this clause is that the policy is to make you whole. If they paid the RC without you having to rebuild, you would be getting more than the value at the time of the loss.
Hope this helps. If you need more info on the RC vs ACV please let me know.
Thanks for the reply! So, I guess there is no way to know what the payout would be in the case of a total loss with an RC policy? How about an ACV policy... would the payout be the limit on the policy when I set it up? The agent let me state the value on the ACV quote. I used $160,000. They set the value on the RC quotes as $400,000. I bought the building for $150,000, which I feel is it's value. I said that $400,000 is too high. They said basically, that's the way it goes. The agent also said that there would be absolutely NO PAYOUT unless I rebuilt. Is that correct? If this particular house ended up a total loss, it would make no sense to rebuild on the same site. I could see myself taking the settlement and moving on to other properties.
@Tim Sansone , I can tell you that most companies on the commercial side of the business will give you the $400,000 if you are going to rebuild, but if you want to walk away with the $, the insurance company will give you the appraised value of the building at the time of the loss, or $150,000 (your purchase price).
Each state has different rules to this, so make sure you understand exactly how the payout will be before you decide how to structure the insurance policy.
@John Mocker would have more insight to homeowners policies in NY as I don't write homeowners.
Thanks Jason! I'll reach out to John.