Here at the Ryan Agencies we get asked this question frequently. Unfortunately, it is typically asked after a loss occurs when your choices have already been made.

That is why it is crucial to determine how you want your home and property losses settled before a loss occurs. Understanding your options is critical. Let’s first define what your choices might be:

• Actual Cash Value (ACV)
• Loss settlements based on ACV are calculated by taking the cost to replace the damaged property and factoring in depreciation for the age and condition of the lost items. 
• Generally speaking, companies do not depreciate items by more than 50% of their replacement value; however, losses settled using actual cash value can result in payouts that are much less than the cost of rebuilding or replacing the damaged item.
• Repair Cost (or Modified Replacement Cost)
• Repair Cost settlements do not adjust for depreciation; however, the items repaired will generally be paid at the cost of commonly used materials and workmanship. 
• Therefore, if you lose high-quality or custom materials, the settlement will be based on commonly used materials and workmanship.
• Replacement Cost
• Think of Replacement Cost settlement as the cost to rebuild your property with like kind and quality. 
• Custom materials and workmanship would be settled based on the same build and quality without deduction for depreciation as they are replaced.

Most property insurance companies offer Actual Cash Value or Replacement Cost settlement options. Typically, insurance companies will require that you insure the property to the settlement value you choose. If you select Actual Cash Value, the amount you may be required to insure the property for will be less than the corresponding Replacement Value.

An accompanying question we are often asked:

• “What does my home’s Market Value or Assessed Value have to do with how losses are calculated?”. 
• The short answer is “not much.” In our immediate area, property market values are typically much less than the replacement cost (cost to rebuild). For instance, your home's market value might be $200,000, but the cost to rebuild it could be $350,000. 

The factors affecting your home or property market value include:

• The land associated with your property.
• The neighborhood in which your property is located.
• The parcel’s features and amenities

The items above are not pertinent to determining the reconstruction cost of your home or property following a loss.

It’s also important to note that the cost of replacing or repairing your property is not static. In recent years, the costs of repairing and replacing homes have gone through the roof (no pun intended).

Now is the time to review your policy's coverage limits to ensure they are adequate and to determine how your policy addresses the settlement question following a loss. It's always better to be proactive now than to realize your choices are already determined after a loss.

For more in depth explanations of What Values Matter Most When It Comes to Homeowners Insurance, see our earlier Blog Post.

Your friends at The Ryan Agency are ready, willing, and able to answer these questions and more about your insurance programs!