Roof Insurance: ACV vs. Replacement Cost

You probably don’t think about your roof often — and that’s not a bad thing. If you are thinking about it, chances are something’s gone wrong. When roofs wear out or sustain damage, the right insurance coverage can soften the financial blow. Most homeowners insurance policies cover your roof to some degree, whether it’s the actual cash value, replacement cost value or guaranteed replacement cost. Understanding the difference between these will help you know what to expect when your roof needs to be replaced.

What is roof insurance?

Homeowners insurance policies generally provide coverage for your roof under the dwelling coverage portion of your policy. Dwelling insurance pays to repair or replace the structure of your home after covered damage, but there are several different ways your roof might be covered. There are also situations where your roof may not be covered at all. If your roof is in poor condition, for example, or if it is over a certain number of years old, your insurance company may exclude coverage for roof damage.

When you receive a quote from a possible insurer, that number is based partly on the condition of your roof. It may also include discounts if you have a new or fortified roof, since these factors mean you are less likely to make a roof-based claim on your policy. Your policy details will state whether your roof is excluded from coverage, but you can also ask your insurance agent directly about how your roof is covered.

What is roof ACV?

Actual cash value or ACV roof coverage means that your insurance company agrees to pay you for the value of your roof in its current state. Essentially, depreciation is factored into your claim settlement. Depreciation is calculated by a claims adjuster, who will inspect the roof to determine its replacement cost, review its current condition and estimate its remaining lifespan.

For example, if the replacement cost — not the amount that you paid for it originally, but the amount it would cost to replace it today — for your roof is $20,000, but the roof loses 5 percent of its value each year (called depreciation), your roof would be worth $10,000 after 10 years. If you have ACV roof coverage, that is most likely the amount you would receive if you filed a claim, minus your deductible. Any costs over and above $10,000 would have to be paid on your own. There could also be additional depreciation taken out based on the condition of your roof. Some 10-year-old roofs might be in great condition, while others could have sustained damage or wear.

There is a connection between the age of your roof and your insurance coverage. ACV roof coverage is typically used for older roofs or roofs that are in poor condition. It is typically a less expensive way to cover your roof. Some insurance policies may give you the option to choose between ACV or replacement cost value (RCV), but if your roof is past a certain age (generally 15 to 20 years old), your insurer may automatically stipulate that you have roof actual cash value coverage. Some states do not allow insurers to use ACV to assess roof replacement coverage.

What is the difference between ACV and replacement cost for roofs?

Replacement cost value coverage is a bit simpler to understand than actual cash value for roofs. If you have a homeowners policy that covers your roof on a replacement cost basis, the insurance company is agreeing to pay you what it would cost to replace your roof with a comparable new roof. Your claims adjuster will base their assessment on new roofing materials that are comparable to what you currently have and offer you a settlement for what it would cost to replace your roof with these materials.

RCV generally costs more than ACV coverage, but it typically means that your homeowners insurance deductible would be your only out-of-pocket expense if your roof is damaged. If your roof is newer or in good condition, you may be able to insure it with replacement cost. Some companies will automatically assign RCV to your roof based on its age, or you may be able to choose between ACV and RCV.

What is extended replacement cost coverage?

The most expensive roof coverage option is extended replacement cost coverage, sometimes called guaranteed replacement cost coverage. This endorsement is usually offered for newer homes and typically applies to your entire Coverage A (aka dwelling) amount, not just to your roof.

Extended replacement cost coverage is usually represented as a percentage, such as 125 percent or 150 percent. This means that you have coverage in excess of your Coverage A limit. If your home is insured for $100,000, which includes your roof, and you have 125 percent extended replacement cost coverage, you actually have $125,000 in coverage, should the $100,000 not be enough for the damage.

Guaranteed replacement cost coverage is similar, except that there is no percentage limit. If you have this coverage on your policy, your insurance company agrees to pay the full replacement cost coverage for the damage to your dwelling, even if it exceeds your coverage limits. If your policy has a $100,000 limit and you have to rebuild your entire house after a tornado, for example, your insurance company will pay the full rebuilding cost, even if it is well over the $100,000 limit.

These coverage options may not be available from all insurers or for all customers. The age of your home, its condition and your coverage limit will all affect your eligibility for these coverage types. For example, many insurance companies do not offer guaranteed replacement cost on homes with a dwelling limit in excess of $1 million because it could be financially devastating for the insurance company to pay out a guaranteed replacement amount on such an expensive home.

ACV vs. RCV for your roof

There are several factors to consider when deciding how to insure your roof. First, what options is your insurance company giving you? Based on the age of your home and your roof’s condition, your insurer may automatically assign a certain coverage type to your roof, taking the decision out of your hands. For example, an insurance company is not likely to cover a 40-year-old roof on a replacement cost basis, since the roof is probably in poor condition and may be more susceptible to damage.

Pros and cons of ACV

If you’re given the choice between ACV vs. RCV for your roof, you will need to consider several aspects of your financial situation to determine coverage. Some of the key pros and cons of ACV coverage include:

ACV pros

  • Usually yields a lower premium
  • May be a more affordable option overall if your roof is fairly new

ACV cons

  • Usually yields higher out-of-pocket costs after a covered loss
  • Depreciation calculation may vary by insurance carrier

Pros and cons of RCV

RCV offers more robust coverage, but it might not be the right choice for every homeowner. Below are some key perks and drawbacks of RCV roof coverage:

RCV pros

  • Likely to reduce your out-of-pocket costs after a covered loss, especially if your roof is older
  • Accounts for real cost factors like inflation and supply chain surcharges

RCV cons

  • Typically more expensive than ACV
  • May not be available if you have an older roof

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