ROOF REPLACEMENT COST VS. ACTUAL CASH VALUE
As an insurance agent with over a decade in experience in Business Insurance and Investors policies, I have met with many property investors to explain the importance of having the proper roof coverage on your home insurance policy and rental properties. When I review policies for investors with other insurance carriers, I often find a large depreciation schedule built into the insurance policy for wind and hail. In an active hail state like Colorado, it’s imperative that investors understand the importance of having the correct roof coverage on their insurance policy.
According to the NICB (National Insurance Crime Bureau) report, from 2017-2019 Colorado in ranked #2 in the United States for hail claims. In our state, we can count on having a hail claim every 5 years. Knowing that this state has such a large propensity for hail and severe weather, I found it important to share my experience and knowledge with you.
Let’s start out with the importance of Replacement Cost vs Actual Cash Value for the roof of your property. Replacement Cost is a type of coverage that replaces the current roof with a new roof without deduction for depreciation. This means that the current roof, no matter how old will be replaced with a new roof minus the deductible within the policy. This option represents the most preferred coverage properties should have in a policy.
Actual Cash Value is a type of coverage that pays for a depreciated value of a roof, minus the deductible. This can cause many problems to investors as the depreciated value can be a judgement call by the claims representative or fixed schedule within the policy form. Let’s look at an example below to help show the difference in a claim settlement based on a 10 year old roof.
|
Replacement Cost Coverage 8 unit apartment complex |
Damage Amount |
Deductible |
Final Claim Payment to insured ($50-$10k=$40k) |
|
Roof Replacement |
$50,000 |
-$10,000 |
= $40,000 |
|
Actual Cash Value Coverage 8 unit apartment complex |
Damage Amount |
Depreciation applied to claim 35% |
Deductible |
Final Claim Payment to insured ($50k-$17,500-$10k =$22,500) |
|
Roof Replacement |
$50,000 |
-$17,500 |
-$10,000 |
= $22,500 |
If you have Actual Cash Value endorsement coverage on your investment property and would like to calculate the depreciation, you can go to: https://www.claimspages.com/tools/depreciation/roofing/asphalt-architectural-shingles/
In the above example the difference on one hail loss/claim would be an additional $17,500 out of pocket expense to the property owner. If the insured is aware of the depreciation deduction for hail losses, it should be included in their annual budget. We are only including Roof Replacement and not including the repair cost for gutters, siding, windows, etc.
When I review policies with the Actual Cash Value endorsement, I also give my clients an insurance estimate of what it would be, if the policy had the Replacement Cost Coverage. Often the difference is minimum compared with the depreciation deduction.
Feel free to contact me so I can review your policies and coverages to make sure your investment properties are properly protected. Understanding your policy and your how claims will be handled is probably the most important part of your insurance policy. Let me assist you with that process.
Evelyn V. Hoelzel
Farmers Insurance Agency Producer
References: http://www.rmiia.org/downloads/2017-2019HailForeCAST.pdf Page 4 chart of largest hailstorms by State