To save dollars and reduce insurance premiums in a competitive insurance market, some Missouri homeowners are offered insurance policies that provide them with “functional replacement cost”.  What does this mean?

If your policy pays you for damage based upon “actual cash value” or “ACV”, you will be paid for the cost to replace the damaged item after subtraction for depreciation.  Depreciation is commonly determined by age and/or condition.  In the end, you will be paid some, and not all, of the total cost to replace the damaged item.

If your policy pays you for damage based upon “replacement cost value” or “RCV”, you will be paid for the cost to replace the damaged item.  The money is typically paid in two payments: the first payment is the actual cash value (see above) and the balance paid after the item has been replaced or restoration work has been completed.  In the end, you should be paid all of what it cost to restore you to where you were before the covered damage occurred.

If your policy pays you for damage based upon “functional replacement cost”, you are not entitled to be restored to where you were before the covered loss.  Instead, the insurance company will decide what to replace the damaged item(s) with.  For example, if you have an expensive slate or tile roof that is severely damaged by a storm and requires replacement, instead of replacing the slate roof with a material of like kind and quality, the insurance company has the option of paying to replace the expensive slate or tile with less expensive but “functional” shingles.  If it is necessary for you to have slate or tile to maintain the style and quality of the home’s appearance, it will be out of your own pocket that the difference in cost will be paid.  This type of settlement is rarely satisfactory to the homeowner but failure to carefully read the policy when shopping for the lowest possible premium could result in long-term regret.

Talk to your agent and know what you are buying.  If you are learning about this type of coverage for the first time as you read this post, talk to your agent and know what you bought … BEFORE you incur damage that can permanently change the value of your home.  You may find that a policy with more complete coverage is still available for a comparatively negligible difference in cost.  That option will not be available to you the day after the storm or fire.

Caveat emptor.

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