Home Insurance Claim Settlement Process
A common characteristic of insurance policies when you file a claim is that you (the policy holder) pays a share of the dollar loss. This out‐of‐pocket money you have to pay before an insurance company covers the remaining costs attributed to your loss is called your deductible.
Understanding the claim payout process is important when both the structure of your home and your personal property are damaged. Being familiar with the settlement types explained below will allow you to choose the one that best meets your needs. Note: The cost of your policy and the claim amount you receive will vary depending on the type of settlement you choose.
Home Insurance Loss Settlement Options
There are four basic kinds of homeowners insurance coverage:
Actual cash value (ACV)
Replacement Value/Replacement Cost (RV/RC)
Guaranteed Replacement Cost (GRC)
Extended Replacement Cost (ERC)
Actual Cash Value (ACV) coverage pays the costs to repair or replace the damaged or destroyed home by estimating the current value of your home and belongings, including depreciation. If your home is completely destroyed, this coverage pays the fair market value of the home at the time of loss.
For example, if you purchased a large high-definition television 5 years ago for $1,000 and it gets stolen, you will receive the estimated value of a 5-year-old television, which might be $300.
A few things you need to know about Actual Cash Value (ACV)
Actual Cash Value coverage only pays for costs up to the limits set in your policy.
ACV coverage pays you for your loss, but often does not pay enough to fully replace or repair the damage to your property.
You can do whatever you want with that $300 from the example above. You can buy another TV, get a bicycle instead or simply use the money to buy groceries.
Coverage with an Actual Cash Value settlement method is typically 20-25 percent cheaper than an Replacement Cost policy.
| Payout Covers | Replacement cost minus depreciation |
| Depreciation Applied | Yes |
| Payout can exceed policy limit | No |
| Payout may be less than restoration cost | Yes |
| Protection against inflation and price surges | None |
| Payout Scenarios to Replace/ Rebuild ($300,000 policy, after deductibles) | Destroyed roof Costs: $20,000 Payout: considerably less, depends on age of roof |
An Example
Actual Cash Value Coverage Example
Citing the kitchen fire example above, if the same $30,000 kitchen fire occurred at a property with an Actual Cash Value settlement method and a $3,000 deductible.
The adjuster depreciates $15,000 from the loss. You will be issued a check for $12,000 (actual cash value minus the deductible). With an Actual Cash Value policy, $12,000 is all you can recover from this $30,000 fire loss.
Just like the TV example above, the homeowner can do whatever they want with that money. Fix the damage kitchen themselves or sell the property as is, and use the money to buy an RV.
Functional Replacement Cost or Market Value Coverage: pays the cost to repair or replace a damaged or destroyed property with a similar kind and quality materials that provides a functional equivalent as the original property, but may not be identical in design, material or quality.
Note: Functional RCV coverage provides less coverage than RCV coverage, but the premiums are lower than other types of replacement cost coverage.
For example, if a building is destroyed by fire, the functional replacement cost may include the cost of rebuilding the building using different materials, designs, or methods that can serve the same function as the original building (e.g., a plaster wall is repaired with drywall). Or if the damage is a total loss, the payment amount is the market value of the home.
Functional replacement cost is often used with older buildings since the materials used in the original construction, or the method of construction may be obsolete or very costly to re-build with like kind and quality.
Replacement Cost Value: insurance coverage pays for the cost of replacing or repairing a damaged or destroyed property with the same or similar property (at current market rates), without deducting for depreciation. In other words, it covers the cost of rebuilding or replacing the property with the same or equivalent property, without considering any loss in value due to age, wear and tear, or obsolescence.
Note: Replacement Cost Value coverage only pays replacement costs up to the limits set in your policy.
Although Replacement Cost Value coverage provides you with more financial protection, it also requires you to be insured to a higher valuation per square foot. For this reason, it is important to have an accurate assessment of how much it would cost to rebuild your home or to replace your belongings. Replacement cost settlements are usually not be available for older homes.
| Payout Covers | Cost to replace property to same/similar value |
| Depreciation Applied | No |
| Payout can exceed policy limit | No |
| Payout may be less than restoration cost | Yes |
| Protection against inflation and price surges | Some, up to the policy limit |
| Payout Scenarios to Replace/ Rebuild ($300,000 policy, after deductibles) | Destroyed home Costs: $375,000 Maximum payout: $300,000 |
An Example
Replacement Cost coverage Example
For example, a kitchen fire at your home causes a partial loss, totaling $30,000 in damage. The deductible on this property is $3,000, so the insurance carrier will pay no more than $27,000.
An assigned claims adjuster visits the property to determine how much useful life was left in what was damaged. The actual cash value of the loss after depreciation is determined to be $15,000. You will receive a payment of $12,000 (the actual cash value minus the deductible). That $12,000 will go towards the necessary repairs and replacements. If expenses exceed that amount, you will not pay out of pocket.
Let’s say the final cost of repairs totaled $20,000. With provided receipts, a second check for reimbursable depreciation will be issued for an additional $5,000. Replacement Cost allows you to recoup some or all of the depreciation that was taken from you. The only part that is not recoverable is your deductible.
What is the difference between Replacement Cost and Actual Cash Value?
Both Replacement Cost and Actual Cash Value account for depreciation, however, Replacement Cost settlement method allows for reimbursable depreciation whereas the Actual Cash Value does not.Note: If you have a loan on the property, most likely your lender will have a set of insurance lending requirements that you will have to meet or exceed. Oftentimes, lenders will require you to carry Replacement Cost coverage.
Extended Replacement Cost VALUE COVERAGE pays the cost to repair or replace the damaged or destroyed home, without a deduction for depreciation. Extended RCV coverage provides coverage above the dwelling limits in your policy, for the damage caused to your home, up to a set percentage or dollar amount.
| Payout Covers | RC/RV plus add-on percentage (i.e. 10% - 50%) |
| Depreciation Applied | No |
| Payout can exceed policy limit | Yes, according to addon percentage |
| Payout may be less than restoration cost | Yes |
| Protection against inflation and price surges | Yes, up to the extended limit |
| Payout Scenarios to Replace/ Rebuild ($300,000 policy, after deductibles) | Destroyed home Costs: $375,000 ERC option: 20% Maximum payout: $360,000 |
An Example
Guaranteed Replacement Cost value policies account for pricing surges in supplies and labor after a major disaster, and the coverage pays the full cost to repair or replace the damaged or destroyed home for a covered peril, even if it costs more than the limits shown on the policy declarations page. This policy is also referred to as "Guaranteed" or "Extended" replacement cost policy.
| Payout Covers | Full costs to restore/replace asset |
| Depreciation Applied | No |
| Payout can exceed policy limit | Yes |
| Payout may be less than restoration cost | No |
| Protection against inflation and price surges | Yes, up to full restoration at current costs |
| Payout Scenarios to Replace/ Rebuild ($300,000 policy, after deductibles) | Destroyed home Costs: $375,000 Payout: $375,000 |
An Example
