Realtor Training. Lesson 5: Roof coverage: Beware Actual Cash Value policies

One day, a friend told me ” I’m just waiting for a hail storm to hit my house so that I can file a hail claim and get a brand new roof.”  My friend was praying for a hail storm!

I looked at her homeowners insurance policy and noticed something.  I told her “Instead of praying for a hail storm, you should be praying for NO hail storm because you have actual cash value coverage on your roof.  You would have to pay a TON out of pocket if you file a hail claim.”

If a hail storm would hit her roof then the insurance company would only pay the depreciated value of what the roof is worth.  That would not be enough money to replace it.  She would need to pay the difference.

There are two ways that a roof can be covered:

Replacement Cost:

If you have a Replacement Cost homeowners insurance policy, then if there is a hail claim, the insurance company will pay the amount of money to replace your roof after you pay your deductible.

Example:  Let’s say that the roof is 10 years old and it would cost $20,000 to tear off the old roof and put a new roof on, and you have a $2,500 wind/hail deductible.  If a storm damages your roof enough for it to need replacement, your insurance company will give you $20,000 minus your $2,500 deductible.

Actual Cash Value:

If you have an Actual Cash Value, then if there is a hail claim, the insurance company will only give you the depreciated value of the roof.

Example:  Let’s say that the roof is 10 years old and it would cost $20,000 to tear off the old roof and put a new roof on, and you have a $2,500 wind/hail deductible.  If a storm damages your roof enough for it to need replacement, your insurance company would find out the depreciated value of the roof and they will give you that amount, minus your deductible.  This might say “your roof is 10 years old, so it is only work $12,000.”  They would give you $12,000 minus your deductible, so you would get $9,500.  It is still going to cost $20,000 to replace, so you will need to pay the difference out of pocket.

Question: How common are Actual Cash Value homeowners insurance policies?

Answer: They are more and more common.  More and more homeowners insurance companies are changing homeowners insurance policies right under their clients’ noses.  Insurance companies save a lot of money by doing this!

The solution: Make sure that your buyers are speaking with an independent insurance agency that is really looking out for them.