Personal Insurance 101: Actual Cash Value – what does it mean?

The insurance industry does itself no favors in terms of being clear, concise and unambiguous (contrary to what the law says).  If you’ve ever attempted to read your insurance policy forms – you know exactly what I’m talking about.  This is where soliciting the advice of an educated, insurance professional is recommended – because it’s our job to decipher it for you and explain it in an understandable way!  It also helps clients and consumers understand how  potential claims may be settled ahead of time.

Automobile insurance policies are traditionally settled on an actual cash value basis.  This is contrary to standard homeowners policies which settle damage to the building on a replacement cost  basis.  What’s the difference?  Actual cash value (commonly referred to as ACV) is calculated by determining an item’s original value and subtracting the amount of depreciation it has incurred.  Replacement cost is calculated by determining the amount necessary to replace an item with a new one.


Replacement Cost:

We’ll explain replacement cost in detail in our next blog post (I can’t hardly wait, can you!?).  However, here is a quick example:  you own a home that was built 10 years ago.  A horrific fire destroys your entire home (no one was injured!).  Your homeowners policy will provide coverage for this loss and pay to replace the damaged home with a new home (including cost of materials and cost of labor) after you pay your deductible.  The important distinction to make is that there is no reduction in the payout for depreciation.

Actual Cash Value:

You’re driving down the highway on a fall night in Wisconsin and BAM! – you hit a deer and total your 8 year old vehicle.  You consequently file a claim with the insurance company and find out that the loss is covered as long as you carry comprehensive coverage.  The insurance company will pay for the car that you have now – not the one you had 8 years ago.  They’ll take the original cost of your vehicle, subtract 8 years worth of depreciation, and provide you a check for that amount (less your deductible).  This, in its simplest form, is an example of an actual cash value loss settlement.  We’ll explain some finer details in a later post – for example, if you lease a vehicle and you owe more on the lease than what the vehicle is worth.

Congratulations!  You’re now an educated consumer! As the spring rolls on, we’ll continue to try and define many common policy terms.  As always, ‘knowledge is power’.

Does it matter what insurance company you do business with?

As an independent agency, we have many options and companies to work with.  Ultimately, this provides a great benefit to our customers – one advisor/professional to work with who has dozens of companies to choose from to find the best coverage and rates for you.  First, the customer needs to decide what is most important to them when choosing an insurance company.  Some factors to consider are as follows:

  1. Claims Service – Yes, different companies have different levels of claim service.  Some companies make the process very easy and provide great support during the process; however, other companies pay claims begrudgingly and can make the process painful.  This is one of our highest priorities when choosing a market for you because a successful claim settlement equals a happy customer.

  2. Price – Price is a dominant force in our industry and is usually a consumer’s top concern.  Price does matter but it is important to verify that other factors are not being omitted to create a lower price – specifically coverage (amongst others).

  3. Coverage Options – Do you have a unique risk exposure? Does the company you have your insurance with offer all the coverage you need?  These are important questions to consider when electing to place business with a company.

  4. Deductible Options – Many companies are increasing home deductibles and limiting deductible options.  If the company you’re with doesn’t have a suitable deductible for you, it may be worthwhile to ask your insurance advisor to explore other options.

  5. Size & Financial Stability – As an independent agency, we represent small, local mutual companies to Fortune 100 companies.  Size does matter – to a point.  It’s important that the company you’re with has enough capital surplus to cover any catastrophic events that may occur.  Furthermore, it’s important that the company allocates enough resources to critical functions of the company (i.e. customer service/support, claims, underwriting, etc.).  With that said, bigger does not always mean better.  We represent some regional companies that are AM Best A+ rated (financially stable) and provide good service, claims service, and pricing (if not better).

As always, it’s important to discuss these factors and any other factors that may apply to you with your insurance advisor to provide the best fit for you.  Every individual and family is different and subsequently, has different needs.  As an independent insurance agency, we feel that our flexibility and options provides a massive competitive advantage and most importantly, the best options for you.

Vacant and Unoccupied Homes – Homeowners and Dwelling Insurance

Vacant HomeDo own a vacant home?  Do you own any unoccupied homes?  Do you renovate dwellings and then subsequently rent them out?  Any of these situations may have unintended consequences on your insurance policies.

Insurance companies are very clever in the wording of their policy forms (which is why its important to read your policy forms!).  They sneak exclusions into the policy that only apply if the dwelling is unoccupied or vacant.  For example, if you buy a rental dwelling with the intent to renovate prior to renting it to tenants, several coverages are excluded until the home is occupied.  For example, theft and vandalism is excluded if the home is vacant for more than 30 days.  Damage caused by freezing pipes is another common exclusion among vacant or unoccupied homes.  Please note that each insurance company will treat their vacancy exclusions differently, so it is important to read your insurance forms for exact coverage.  More importantly, it is essential that precautions are taken to prevent any of the above losses from happening.  Many common precautions are:

  1. Keeping the heat level high enough to prevent freezing pipes

  2. Installing a security system to prevent any break-ins.  Other simpler measures are to lock all door and windows and have a neighbor or relative check the house daily.

  3. Have motion detecting lights installed outside

  4. Install lights inside on a timer system to give the appearance that the home is occupied

  5. Shut off the water in the home while unoccupied to prevent any catastrophic water damage

Furthermore, many of the same exclusions apply if you own a home with no intention of renting it out, but rather plan on occupying it yourself.  However, as many homeowners can attest to, many owners don’t move into their homes right away.  Many existing homeowners or renters insurance policies will extend coverage for personal property to their new location for a temporary time period (i.e. 30 days); however, no coverage is extended to the dwelling, structure, or detached structures.  So a new home that is bought but unoccupied may be susceptible to the exclusions listed above.

It is important to be upfront and honest with your insurance professional on the expected timeline of occupancy so that they can determine what coverage may be best for you.  Also, keep them up to date on any changes to your timeline for occupancy so any needed action may be taken.  Some companies do offer specialized, short-term (one, three, or six month) policies specifically designed to cover vacant or unoccupied homes.  If you plan on buying a new home – whether it be for yourself or for a tenant – it is very important to consult with your insurance professional to determine if any of these exclusions may apply to you.