ACV vs. Replacement Insurance Policies

Selling Property Insurance as “Replacement Cost Insurance” Should Only Be Allowed If Replacement Value is Paid Immediately

Policyholders know when they have been “ripped off” by the fine print of an insurance policy. The most common “rip off” is when insurance companies sell replacement cost insurance and then do not immediately pay replacement cost value. A number of insurance companies, like Chubb and AMICA do not play this “bait and switch” game in other jurisdictions. However, the insurance industry wants to change Florida law to make it legal in Florida.

The problem is that “replacement cost insurance” is never marketed truthfully by most of the insurance industry. Want an example? How about the Insurance Information Institute and its explanation of Replacement Cost Insurance:

Replacement Cost and Actual Cash Value

Replacement cost provides you with the dollar amount needed to replace a damaged item with one of similar kind and quality without deducting for depreciation—the decrease in value due to age, obsolescence, wear and tear and other factors. An actual cash value policy pays you the amount needed to replace the item minus depreciation.

Suppose, for example, a tree fell through the roof onto your eight-year-old washing machine. If you had a replacement cost policy for the contents of your home, the insurance company would pay to replace the old machine with a new one. If you had an actual cash value policy, the company would pay only a percentage of the cost of a new washing machine because a machine that has been used for eight years would be worth less than its original cost.

Suppose, also, that the tree damaged your 15-year-old roof so badly that it had to be completely replaced. If you had a replacement cost policy, the insurance company would pay the full cost of installing a new roof. If you had an actual cash value policy, it would pay a smaller percentage of the cost of replacing it.”

Does this explanation say that the policy form subtracts depreciation from replacement cost until the item or structure is repaired or replaced? No. What the insurance company wants people to think is that when they buy replacement cost insurance, they will get paid full replacement right away. In many states, there is no difference between actual cash value insurance and replacement cost insurance unless you actually spend the money within a set period of time and make the replacement. You pay a higher premium for the replacement coverage, but the benefit is the same as actual cash value unless you make the repair or replacement within the time frame allowed by the policy.

If an insurance company wants to sell replacement cost insurance, it should be required to pay replacement cost right away. If it wants to sell a policy that pays replacement cost only after an item or structure is repaired or replaced, it should sell “contingent replacement cost coverage.” The Florida legislature should not encourage this bait and switch with legislation specifically approving it.

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