On an insurance-related reconstruction or roofing job, actual cash value (ACV) and replacement cost value (RCV) can be very confusing. Both have to do with how much insurance is paying out, and when you actually get it.
Property owners are often caught off guard when the first check isn’t what they expected it to be, and the paperwork that comes along with the payout can be hard to make sense of.
Your first thought might be that they’re shorting you. Or you might be afraid that you don’t have enough money to do the work that actually needs doing. Both of those are reasonable reactions, and neither one is necessarily true.
The payout comes down to two things: what kind of policy you have, and what has been approved on the estimate.
ACV vs RCV insurance terms, in plain English
Replacement cost is what it costs to buy and install the specific thing again today. Things like carpet and roofing shingles, at current prices.
Actual cash value is what it would cost new minus depreciation. It’s what your ten-year-old carpet is worth as ten-year-old carpet, not as new carpet.
Most homeowner policies are RCV (replacement cost value). ACV (actual cash value) policies turn up more often on rental properties.
If you have a replacement cost policy, you’re entitled to the replacement cost at today’s value no matter how old the materials are.
The depreciation holdback, and why it’s there
Just because you have an RCV policy doesn’t mean you get the full payout all at once. On RCV policies, it’s very common for insurance to withhold the depreciation part of the funds, whether for reconstruction or a roof replacement, until the work is actually completed. Often it’s 20 to 40 percent of the total amount.
The logic behind it isn’t sinister at all. The carrier agreed to pay what it costs to replace your materials, but only if you actually replace them. If they released the full replacement cost up front, sometimes homeowners might pocket the difference and live with the old carpet. The solution is to pay the depreciated value now and the remaining depreciation later, once there’s proof the work happened.
What releases the rest of the money
The depreciation that was held back is released after the repairs are done and documented.
That means doing the work is what gets it paid. What the carrier wants is proof: the finished scope, plus invoices or receipts showing what was done. This is something we manage regularly. We document the job for your adjuster as we go and communicate with them when the project is finished so that your funds can be released.
If you take the first check and don’t do the repairs, the rest of the money doesn’t come.
Occasionally, homeowners see the initial ACV check that was released and are afraid they won’t have enough to do the full repairs. If that’s something you’re worried about, let us know and we can help explain what’s actually happening with the release of funds.
All of this assumes, of course, that you have an RCV policy. If you have an actual cash value policy, whether for your roof or for repairs, only the depreciated value of the approved estimate will be released.
What if the estimate itself is too low?
That’s a different conversation, but it’s somewhat related.
Holding back depreciation is a timing question, whereas an approved estimate that lacks sufficient funds is usually a scope question. (Scope is the specific work that needs to be done.)
The answer to a scope question is documentation and communication. The first number a carrier issues doesn’t have to be the final one, and it usually isn’t. Carriers typically adjust when they’re shown a documented scope and confirmed pricing beyond the initial approved scope. This is a large part of what our estimators provide for the adjuster.
When our scope and the carrier’s scope and estimate disagree, we work with the adjuster to get in alignment. It’s our preference to make sure we come to an agreement with the carrier before any work starts, so no one involved incurs liability they didn’t want. There’s more on how that works in our pipe burst in your house post.
What to do right now
If you’re holding a first check and an estimate that don’t match, and it isn’t making sense to you, let us know. We can walk you through it.
We’ll tell you whether the gap is the depreciation carriers often hold back, a scope that’s short, or some of each. We work with every carrier and we document losses for the adjuster as a matter of course. If you’re a step earlier than this and still wondering whether the loss is covered at all, start there.
One final thing that gets confusing in all of this: the money released is yours to direct, as long as the repairs happen. If you’ve been wanting to go from carpet to LVP, you can absolutely use the insurance funding to make that happen and still get the depreciation released. Insurance pays for like kind and quality of what was damaged, and you pay or keep the difference.
Call (303) 660-6216 any time. Colorado Springs is (719) 922-6448.
Key Takeaways
- Most homeowner policies are replacement cost (RCV). Actual cash value (ACV) policies turn up more often on rental properties.
- On a replacement cost policy, the first check is often the depreciated value, not the final number.
- The withheld portion is the depreciation holdback, often 20 to 40 percent of the total.
- It’s released after the repairs are done and documented, so doing the work is what gets it paid.
- Take the first check and skip the repairs, and the rest of the money doesn’t come.
- If you’re worried the first check won’t cover the job, say so early and we can walk you through how the rest gets released.
- On an actual cash value policy, only the depreciated value of the approved estimate is released. There’s no second check.
- A short estimate is a separate issue from the holdback, and documented scope is what moves a carrier’s number.
- The payout is yours to direct as long as the repairs happen, including changing materials, with you paying or keeping the difference.
Frequently Asked Questions
Yes, that’s the condition it’s held against. The carrier releases it once there’s documentation that the work was done, usually a completed scope and invoices or receipts. Partial repairs generally release a partial amount. If the amount of the first check isn’t enough to start the job, tell your contractor and your adjuster that early rather than at the end.
You can, and it costs you the rest of the claim. The depreciation stays with the carrier, so you’ve settled for the used value of your materials. Worth remembering that the damage doesn’t go anywhere either. Wet framing behind new-looking drywall is still wet framing, and it tends to reappear as a bigger, uncovered problem later.
Usually because they were built for different purposes. Carrier estimates come out of standardized estimating software with pricing built around an average home and average conditions, which is what makes claims consistent across thousands of losses. Your house isn’t average in some specific way, and that’s where the gap shows up. It’s a normal disagreement with a normal resolution: our documented scope goes back with photos and readings, and the number gets revisited on the evidence.
