The basic concept of Replacement Cost coverage is to be paid the full cost to repair or replace, minus your deductible, assuming you actually do repair or replace the damage. Let’s say you have twenty year 3-tab shingles installed nine years ago. A storm comes through and damages them, and your insurance company agrees that your entire roof needs to be replaced. You get a contractor bid for $7000 to do the job. Your Homeowners policy features a $1000 deductible. With Replacement Cost coverage, when you replace your shingles you will be paid $6000 ($7000 loss - $1000 deductible).
The concept of Actual Cash Value coverage is different. It subtracts for depreciation, calculating how much of the life expectancy of the material is used up. Using our example above, with Actual Cash Value coverage, if the claim adjuster assesses 45 percent depreciation (5 percent per year times 9 years), you would be paid $2850 ($7000 loss - $3150 depreciation - $1000 deductible) instead of $6000. That’s a big difference, wouldn’t you say?
The difference could become even more dramatic as your roof ages. If those shingles were 15 years old instead of 9, an adjuster calculating depreciation at the rate of 5 percent per year would subtract 75 percent depreciation – reducing your insurance payout to a mere $750 ($7000 loss - $5250 depreciation - $1000 deductible)!
In the spirit of full disclosure, I should mention that I have sometimes seen adjusters be a little lenient on depreciation percentage, not always assessing a full 5 percent a year on twenty year shingles. Also, architectural shingles which have been popular for a few years now often have a longer life expectancy of sometimes 30 or even 40 years; we’d expect to see a lower yearly depreciation rate on these type of shingles.
But my point is that the concern with applying a deduction for depreciation to shingles is how quickly they do depreciate. While certain types of siding may last a lifetime, most asphalt shingles installed 20 years ago in our region are ready to be replaced, meaning that they have little “actual cash value” remaining.
The idea behind Actual Cash Value coverage is that you, as the homeowner, should be planning for and saving for replacement of your shingles as their age progresses towards expected life end. So if you have twenty year shingles which you estimate may cost $8000 (with inflation) to replace at 20 years of age, you should put aside $400 each year so that when they turn 20 you have the $8000 needed to replace them.
For a Homeowner practicing this savings plan, Actual Cash Value will work just fine, as it will supplement your existing savings to replace your roof earlier than expected due to storm damage. However, those of us living in the real world realize that very few people actually budget and plan in this manner. For the rest of us, the sudden need to come up with $4150 or even $6250 towards an unexpected $7000 roof replacement may not be convenient, easy or even possible.
I say all this to suggest that some readers of my blog may not even be aware of what kind of coverage you have on your roof. Many Homeowners carriers are selling “Replacement Cost policies” with endorsements added which restrict the roof shingles to Actual Cash Value. So you may think that you have Replacement Cost coverage on your roof when in fact you do not.
Some insurance carriers may start you out with Replacement Cost coverage on your roof but then add an Actual Cash Value restriction at a later renewal, once the roof reaches a certain age (10, 15 or 20 years old, as examples). While they normally disclose this in the renewal documents they send, many policyholders may not read their renewal information or, even if they do read it, they may not really understand the ramifications of what they are reading.
For these reasons and more, I contact my clients every year and offer them an annual review. Meeting your agent once a year for a quick review of your insurance coverage is an important part of both making sure your insurance keeps up with your changes and making sure you keep up with your insurance changes. When your agent contacts you to encourage this meeting, set aside a few minutes to do it. If you don’t have an agent that offers this kind of service, maybe it’s time we talk.