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Claims payouts, what do you know about GRC and ACV?

ACV is a common term and condition on insurance policies whether the policy is sold as ACV or GRC.  It’s a condition designed to help the insurance company maintain an acceptable exposure to loss as well as allowing insureds a method of managing costs before a claim while providing some restitution after.  It’s also a term that many insurance purchasers are not familiar with until they have a claim.

The true test of an insurance policy is when the insured has a claim, at least that’s the impression that many consumes have.  In fact, an insurance policy is only a guarantee until a person needs to use it and then it becomes very important, so knowing key terminology will go a long way to making the claims experience a smooth experience. 

ACV is one term that is often used after a loss and it refers to Actual Cash Value of an item or many items.  It is a key term and concept that insurance adjusters use when working with those who have suffered a loss, big or small.  An insurance policy might only be for Actual Cash Value of the items covered listed the policy declaration page or it may be for Guaranteed Replacement Cost, but even with the second policy the ACV clause might come into effect. This is for items that will not be replaced, and the calculation can be different.

If a home insurance policy was purchased as ACV, the policy would only pay up to the amount of the actual cash value at the time of loss.  It would also calculate depreciation to reach a final actual cash value at today’s value or the value immediately prior to the loss. 

With a GRC policy the insured is guaranteed replacement cost in today’s dollars of like kind and quality when available.  It means the insurance company replaces your home and contents to best match, size, features, and quality that was present immediately prior to the loss.

So, what is the difference?

When you look around your home, particularly in storage areas, there may be many items that you own but would not replace if they were destroyed in a total loss.  Such things as an extra toaster, older furniture in the basement, and perhaps an old freezer your grandmother did not need any more are all items that one might not replace but they still have a cash value.  How an insurance company values those items can be different from company to company.  The general practice and starting point to determine the ACV of an item is to go back in time and determine what it was worth brand new and then apply a depreciation formula against it.

Remember that freezer your grandmother gave you?  It was worth $1000 when it was purchased 10 years ago and now it’s been destroyed due to water damage in the basement.  You had another one that was new and better and really didn’t want to replace this one because it was taking up too much space.  On your statement of loss, you list it but explain to your adjuster that you would settle for actual cash value. 

In this case the freezer is 10 years old and the depreciation is set at 80% so the freezer’s ACV or actual cash value is $200.  However, that isn’t the only way ACV is calculated. 

Now what happens if a home insurance policy is listed with Guaranteed Replacement Cost and an item that is damaged or lost will not be replaced.  The first thing to remember is that an insurance policy is not for financial gain so simply providing the replacement cost cash value for an item that is not going to be available.  In this case there can be a cash settlement, but it also depends on how each insurance company calculates the final value. 

Let’s say that the freezer from the first example is new, 6 months ago it was won in a raffle.  Its value is $1000 and it’s not going to be replaced as insureds had no need for it.  The insurance company might use this common formula to arrive at the ACV:  70% of replacement cost less depreciation.  Since the freezer is new and the starting value is $700 but it’s moving towards being a year old and the deprecation rate is set at $100 per year.  The final settlement is $600. 

As shown above see the settlements are different and assign a values that reflect the condition of the item and the value the insured placed on it.  The old freezer had little value and the insured would not be put in a better financial place with a $200 settlement.  The new freezer was also an additional item and the insured received a settlement amount that allowed them to re-allocate funds in a fair manner to something that they might need more than a freezer. 

Written By: BSI