Replacement Cost vs Actual Cash Value: What Your Roof Claim Really Pays

Why Your Roof Claim Check Seems Low, and Why There Might Be Another One.

How the payout is calculated

Homeowners filing a claim often expect that the estimate they get by contractors or public adjusters is the amount that insurance will pay. Instead, they're given an insurance check that's less than what the contractor estimated for the job. 1 Actual Cash Value and Replacement Cost Value are two common roof-payment methods used by insurers, differing mainly in how depreciation and the deductible are applied.

Actual cash value covers the cost of replacing or repairing the damaged property minus depreciation. Depreciation is deduction from the replacement cost based on the age and condition of the roof at the time the damage occurred 2. While replacement cost value covers the cost of replacing the damaged property with new property of similar kind and quality, but without deducting for depreciation 2.

When a roof is covered by a replacement cost policy, the insurance company will typically pay the actual cash value of the roof up front, and then release the remaining depreciation to the policyholder after the repairs are completed and the receipts are submitted 3. The depreciation that is held back is known as recoverable depreciation 4.

Find the settlement basis on the policy

Policyholders should look at the declarations page of their policy, which is the first few pages of your policy that show the specific coverages, deductibles, and other important information. Look for the settlement basis, which will be labeled as either "Replacement Cost," "Actual Cash Value," or a roof settlement endorsement 9. This information will be under "Loss Settlement" or "Coverage A – Dwelling" 10.

The roof settlement basis may also appear on your declarations page as an endorsement number instead of plain-language terms. Check for terms like "Roof Loss Settlement — Actual Cash Value" or "Roof Surface Endorsement" 12.

Why the roof may be on ACV even when the policy looks like replacement cost

Even if a policy looks like it covers replacement cost, the roof may still be covered at actual cash value due to certain endorsements or conditions. For example, some policies have a "roof age schedule" that switches roof settlement from replacement cost to actual cash value at a certain age threshold, such as 12 years old 11.

Look for endorsements with names like 'Roof Loss Settlement — Actual Cash Value' or similar terms.

Deductibles that change the math

The deductible is an important factor in roof claims, as it can significantly reduce the amount of money you receive from your insurance company. Deductibles for roof claims can be either a flat dollar amount or a percentage of the insured value of your home. Percentage deductibles are common for wind, hail, and hurricane losses 5.

Percentage deductibles are calculated as a percentage of the dwelling's insured value, not as a percentage of the loss amount. For example, if your dwelling is insured for $350,000 and your deductible is 2%, then your deductible would be $7,000, regardless of the size of the loss 6,7.

This means that a higher percentage deductible can result in a lower payout from your insurance company, especially if the value of your home is high.

Worked claim example

Let's say you have a 20-year-old roof that was damaged by a windstorm. The contractor estimates that it will cost $10,000 to replace the roof. Your home is insured for $350,000, and you have a 2% deductible for wind damage.

If your policy covers replacement cost, the insurance company may pay you $7,000 up front (the replacement cost value minus the depreciation based on the roof's age and condition). After you submit receipts for the completed repairs, the insurance company will reimburse you the $2,000 depreciation holdback, minus your $7,000 deductible, leaving you with a final payment 3,4,7,8.

However, if your policy only covers actual cash value, the insurance company will only pay you the replacement cost value minus the depreciation, which is the actual cash value. That means you'll be responsible for paying the remaining $4,000 out of pocket, since the $2,000 depreciation is permanent 8.

In either case, you'll need to pay your $7,000 deductible before the insurance money is paid out.

How to know which coverage you have

To determine whether you have replacement cost or actual cash value coverage, you can look at your declarations page. This is the first few pages of your policy that outlines your coverages, deductibles, and other important information.

Look for a section labeled "Loss Settlement" or "Coverage A – Dwelling." This is where you should see the words "Replacement Cost" or "Actual Cash Value" listed next to your roof coverage. If you see "Replacement Cost," that means that in the event of a claim, your insurance carrier will pay the cost of replacing the roof with a new one, minus any applicable depreciation.