By Lorie Ham
The beginning of a new year is a good time to take stock of a lot of things in our lives, including our insurance coverage and whether we might need to make some changes. But it helps to have more information when making those decisions, such as how does your insurance company arrive at the replacement cost value (RCV) of your home?
In 2019, we shared an article on the difference between RCV and actual cash value (ACV). Your policy provides for RCV for most items. That means they agree to repair or replace your property with new property of like kind and quality. However, initially, they pay the ACV. The ACV is the cost to repair or replace the damaged property less depreciation. Depreciation takes into account wear and tear, age, deterioration, and obsolescence. ACV is approximately fair market value. You can check out the whole article here.
To learn more about how your insurance company arrives at the replacement cost of your home, we recently chatted with Jerry Linscheid, Chief Executive Officer of Mennonite Aid Plan/Mennonite Insurance Services.
Q: What is the process of determining what the replacement cost will be for a home? What things are taken into consideration?
Jerry: Every insurance company needs to be able to document how they arrive at the replacement cost estimate. Mennonite Aid Plan uses a program called e2Value to arrive at those estimates because it updates its costs at least quarterly and returns estimates that match our experience with total losses. We enter into e2Value the architectural style, square footage, year built, construction quality, type of roof, shape of the home, and about eight other characteristics of your home. The program takes into account labor costs and material costs where the home is located.
Q: Is this calculated when someone purchases the insurance for the home or is it determined once a claim is filed? Or is updated every so many months/years?
Jerry: We run a replacement cost estimate when the policy is first written and then every two years after that. This keeps the coverage close to the cost to replace the home should it be completely destroyed.
Q: How do you choose the builder of a replacement home?
Jerry: The homeowner is in charge of choosing the contractor they want to work on their home. Our adjusters will prepare a repair estimate for a claim. That determines the amount Mennonite Aid Plan can pay. The homeowner then knows how much money they have to work with. If the homeowner already has a contractor, our adjuster can work with the contractor during the estimate process. The contractor will then usually agree to make the repairs for our adjuster’s estimate.
Q: How long can it take for a home to be replaced?
Jerry: For a completely destroyed home, a year to rebuild is pretty quick. Some factors that can lengthen the time are the remoteness of the home, whether this was an isolated claim or part of a catastrophic event, and whether there are building material supply chain issues. Generally, the longer the rebuilding takes, the more expensive it will be. The price of labor and building materials always seems to go up.
Q: What if you want something different in the replacement home from what was in the original one? Can the client make that choice and pay the difference, or benefit from the difference if that makes the cost less?
Jerry: The policy reads that we pay to replace the home with items of like kind and quality, subject to the policy limits. For example, if your kitchen cabinets are stock cabinets made of particle board and you want custom solid cherry cabinets, we will pay to replace your current cabinets and you can pay the difference to upgrade. It can get a little complicated if you want to upgrade certain items and downgrade others. We try to be reasonable in those circumstances.
Q: Does insurance cover an alternate place to live while waiting for the replacement home?
Jerry: Homeowner policies include coverage that is known as “Additional Living Expenses (ALE).” ALE is defined as those additional expenses you incur as a result of the loss. If your home is destroyed or made unlivable because of a loss, we will pay the cost to rent a different home for you during the repairs. You are still responsible for your mortgage payments and ongoing payments associated with your home. In cases where you need to leave your home due to a claim, it is crucial to keep all your receipts. While not every expense is an additional expense, you need documentation to claim the covered expenses. It is best to document everything and later have your adjuster help sort out what is covered and what isn’t.
We hope this answers a lot of your questions, but if you have more questions about this, or have any other insurance-related questions, feel free to contact your agent at Mennonite Insurance Services, they would be happy to help (559) 638-2327. Follow the Mennonite Insurance Facebook Page to keep up with the latest news.