Actual Cost Coverage or Replacement Cost Coverage

Buying a home, for most of us, is both an exciting and overwhelming experience. During the transaction we are inundated with mounds of legal documents that our real estate agents are all too quick to hurry us through. Later, when it is time to call our insurance agent to discuss coverage for our new home, there is exhaustion and little enthusiasm left to talk “coverage.” The end result is that people tend to gloss over their homeowner’s insurance coverage, especially coverage concerning personal property kept in their home. People find out all too late and only when disaster strikes that they will not receive enough from their insurance company to replace their personal property. Understanding up front the personal property coverage provisions in typical homeowners insurance policies however, can lessen the anxiety of reviewing insurance documents and ensure that you get the coverage you asked for in the first place.

Personal property coverage, i.e., coverage not for the structure of your home, but coverage for the personal items you maintain in the home such as furniture, appliances, clothes, jewelry, art work and other family mementos, is typically found in Section C of a standard homeowners insurance policy. The insuring clause generally contains the following language: “we insure for direct physical loss to the property described in Coverage C caused by a peril listed below unless otherwise excluded.” The perils range from fire, smoke, discharge or overflow of water or steam to vandalism and theft. Typically, following the grant of coverage for personal property is the exclusion section that takes away or limits the coverage. You will want to review this section carefully and be sure that you understand it. If you do not understand the exclusions and how they apply talk to your agent and make sure he or she answers your questions to your satisfaction.

Generally, insurers offer two choices of personal property coverage under a standard homeowners insurance policy. The first choice of coverage is Actual Cost Value (ACV) and the second, for a higher premium, is Replacement Cost Value or (RCV). The total amount of personal property coverage is roughly 50% of the insured dwelling coverage. So, if your dwelling coverage is $200,000.00, your personal property coverage should be roughly $100,000.00.

The tangible difference between ACV coverage and RCV coverage is demonstrated in the following example. If you suffer a loss and your policy contains ACV coverage for personal property, your insurer will adjust your loss using a method of depreciation. For example, if you purchased a sofa for $ 500 five years before your loss, it is likely that the cost to replace the sofa today has increased. Let’s say the replacement cost of the sofa is $ 700. The depreciated amount of the sofa or the betterment may be 30% or $ 150. So, $ 500 minus $150 equals $ 350. With ACV coverage, you are entitled to only $ 350 to replace a sofa that costs $ 700 today.

If, on the other hand, you purchased replacement cost coverage, you are entitled to the full $ 700 to replace the sofa. Recovering the replacement cost, however, is a two-step process. Up front your insurer will give you a check for the actual cost of the items lost. You then have to go out and purchase replacement items and present the receipts to your insurer. After examining the receipts, your insurer will then issue you a check for the difference between what they already paid you and the amount you spent to replace the items.

Always be mindful of the notice and proof of loss requirements contained in your policy. Typically, with respect to a personal property loss, you must notify your insurer within sixty days of the loss and present a proof of claim. To present a proof of claim you must submit a list of all of the items lost and sign an affidavit under penalty of perjury that the items were in fact lost or destroyed. Though the process of recovering a personal property loss from your insurer may be painstaking, you do not always have to wait to get money. As a courtesy, many insurers will cut you a check up front or give you an advance for living expenses and items of necessity. You will be required, however, to provide proof .

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