Few people look at their home insurance policies -even fewer actually read them. If you do happen to read your policy the words you want to see are “Replacement Cost”or “Replacement Value”.
And once you do see these words in your policy what do they tell you? Likely very little unless you understand insurance law. Yes, you get the cost of replacing the item but what cost? The cost you paid? The cost or value the item was worth at the time of the loss? Or the cost to replace the item? In fact it is the cost you pay to replace the item regardless of what you paid and regardless of what it was worth before being destroyed or damaged beyond repair. But here’s the catch. An insurance company is only required to pay replacement cost when the item is actually replaced. Otherwise, the insurer only has to pay what is known in the industry as Actual Cash Value or ACV.This is basically the value of the item at the time of the loss.
ACV is also sometimes referred to as the depreciated value because insurers will sometimes use a percentage of original cost to depreciate the item down to what they claim is the ACV.
Not surprisingly, there can be a very significant difference between the Replacement Value and the ACV of an item. Yes, some items (such as art and Jewellry ) can increase in value over time but most things in your home do not. And with certain items such as electronics (think large screen TVs) the replacement cost may well be much lower than what you paid for the item years ago. The problem faced by many people who have suffered a loss, particularly a large loss is that they don’t have the money on hand to replace and therefore have to settle a claim for far less than what they have really lost-a loss for the policyholder and a significant benefit to the insurer.
Some insurance companies will pay the ACV and if the item is replaced within a reasonable time and a receipt is provided proving replacement, will pay the difference between the ACV and Replacement Cost when the item is purchased. Another way to ensure you get full replacement cost is to request the insurer pay the vendor directly for the items you replace. Some insurers will agree to do so-others will not. They are not legally obligated to do so. You can also ask for an advance and use the funds to replace as many items as you can with the funds available. If no funds are available to replace then you can attempt to borrow the funds to replace and add the cost of borrowing to the claim.
So when you do finally get down to reading your home insurance policy and you don’t see the words “Replacement Cost” or “Replacement Value” call your broker immediately and find out why those words are missing.