The Actual Truth About Replacing Personal Property After An Insurance Claim
March 21, 2019 - MarcWites
A major misconception many policy owners have is the belief that their homeowners insurance company will pay the full amount to replace their personal property that has been damaged, destroyed, or stolen. In reality, this is not always the case.
It depends on whether the insurance policy provides for “actual cash value” or “replacement cost” for personal property, and the specific terms and conditions of this part of the insurance policy. As a result, it is very important for all homeowners to review their policy options and understand the difference between “replacement cost” and “actual cash value” before selecting the coverage best suited for their personal property and belongings.
WHAT DOES ACTUAL CASH VALUE AND REPLACEMENT COST REALLY MEAN?
To begin, there are a few terms to know and understand. Personal property includes items like clothing, furniture, electronics and so forth. “Actual cash value” is similar to fair market value, and it generally means what the item of personal property is worth today and factors in depreciation. In contrast, “replacement cost” generally means the cost to replace the property with a brand new item that is similar in kind and quality.
At first glance, actual cash value may seem like the more appealing option. A policy owner who just sustained a loss or damage to their personal property would want the actual cash value for their belongings. But, “actual cash value” does not mean “all the cash you need” to replace your property. Rather, actual cash value is subjective, and also can become complicated
It incorporates a reduction for depreciation, whereas replacement cost does not. In simple terms, “actual cash value” is more like “fair market value” and it means the amount of money someone might pay at a garage sale, or on ebay or craigslist, to buy your used, 10 year old couch!
So, from the insurance company’s view, the term “depreciation” is an important one, as it means the original value of the item minus everyday wear, tear, age, and other factors that are applied to determine the current price of the item. As a result, when insurance companies use the term “actual cash value” they really mean fair market value, which is the selling price for a used item that a buyer and seller can agree upon.
Replacement cost, to the contrary, is the amount necessary to replace your damaged property with a brand new item, whether a couch, area rug or other type of personal property. This may be ideal for homeowners due to the fact that it pays the costs to replace the property or items without the deduction of depreciation. Essentially, the homeowner gets the item replaced with a brand new one.
HERE’S AN EXAMPLE
When determining which coverage to get, consider this example: A homeowner purchased a high end leather couch that they paid $3,000 for in 2007. After Hurricane Irma, the contents of the home were ruined due to water intrusion, including the $3,000 couch.
If the homeowner had replacement cost coverage, the insurance company would pay the insured to repurchase the couch or a similar model couch if the old one was not available. It does not matter that the couch was over ten years old; replacement cost does not consider the wear and tear the couch had sustained, and depreciation is not a factor.
When your policy provides for replacement cost, the item is replaced with a similar, if not the same, item at today’s cost.
However, for a homeowner who has actual cash value coverage, the insurance company may offer $500 towards a new couch. The insurance company won’t care that your couch was in mint condition, had rarely been used, and that your dog or cat never peed on or scratched the couch.
In other words, “used is used.” In order to calculate the actual cash value, the insurance company will take the replacement cost and minus depreciation to roughly determine the fair market value of your used couch, and that is what would be paid to the insured.
REPLACEMENT COST “COSTS”
While replacement cost is obviously better than actual cash value, it comes with a cost. You will pay a higher premium for a policy that provides for replacement cost because in the event of a loss your insurance company will be required to pay more money to resolve your claim. As they say, you get what you pay for.
To that end, homeowners should pay careful attention to the language in their policy about the dollar limit on personal property coverage. It is important to have enough coverage so that in the event of a total loss your policy will cover your entire claim, whether at actual cash value or replacement cost.
In some instances, policy owners still may end up paying out of pocket to cover any additional amounts if the limits have been exceeded.
IS ALL PERSONAL PROPERTY COVERED?
Not all personal property is the same. What about items that have a value that may increase over time, such as a rare autograph, fine piece of artwork or a one of a kind antique? Unfortunately, insurance companies do not consider increases in value. Antiques, collectibles and artwork may not only have a cap on how much coverage is applied to them, they may be excluded from the policy altogether.
Individuals with these types of items should always have documentation as to the value of each item, and ideally have an appraisal performed. Any documents indicating the value of this type of property should be kept in a safe place, and you should keep extra copies in a location other than your property, such as a safety deposit box at the bank or in the cloud.
As the values of antiques constantly change, it is important to keep your insurance coverage current and updated. Individuals with collectibles, antiques, or artwork should speak to their insurance agent to make sure that they not only have coverage for such items, but that they adjust the amount of coverage as the value of such items increases over time.
KNOW YOUR POLICY
Remember, policies can always be modified and changed. It is important to review the homeowners insurance coverage options yearly in order to obtain the best priced premium for the individual’s specific budget, while maximizing coverage.
IF YOU NEED HELP
If you suffer a loss and your insurance company fails to pay the right amount for your personal property, or any other aspect of your claim, contact The Wites Law Firm. We represent homeowners in claims against their insurance company. The consultation is free, and you won’t have to pay our attorney’s fees if your case is settled in court or won at trial as Florida law requires the insurance company to pay your legal fees.