Roof insurance: ACV versus replacement cost

Although you may not think about your roof often, it provides you with protection from the elements. Wind, water and hail can all damage your roof and weaken its ability to protect you, your family and your belongings. You may find yourself wondering if your homeowners insurance policy provides coverage for those damages.

Your homeowners insurance company likely covers your roof in one of three ways. Your roof may be covered for its replacement value or at its depreciated value. It could even be covered on a guaranteed replacement basis. Understanding the difference between these types of coverage can help you to better understand your homeowners insurance policy.

Roof insurance

Homeowners insurance policies generally provide coverage for your roof, but there are several different ways your roof might be covered. There are also situations where your roof may not be covered at all. If your roof is in poor condition, for example, or if it is over a certain number of years old, your insurance company may exclude coverage for roof damage. Talking with your agent is one of the best ways to determine how your insurance policy would respond to roof damage.

Actual cash value

Actual cash value coverage means that your insurance company agrees to pay you for the value of your roof in its current state. Essentially, depreciation is factored into your claim settlement. Depreciation is calculated by a claims adjuster, who will inspect the roof to determine its replacement cost, review its current condition and estimate its remaining lifespan.

For example, a comparable brand new roof might cost $20,000 and have a lifespan of 20 years. This would mean that it loses 5 percent of its value each year. If your roof is 10 years old, it has lost 50 percent of its value, meaning the actual cash value of your roof is now $10,000. Additional depreciation may be taken out based on the condition of your roof. Some 10-year-old roofs may still be in great condition, while others could be impacted by unrepaired wind or hail damage.

There is a connection between the age of your roof and your insurance coverage. ACV coverage is typically used for older roofs or roofs that are in poor condition. It is typically a less expensive way to cover your roof. Some insurance policies may give you the option to choose between ACV or replacement cost, but if your roof is past a certain age (generally 15-20 years, but each insurance company will have its own guidelines), your insurer may automatically stipulate that you have ACV coverage. Some states do not allow insurers to use ACV to assess roof replacement coverage.

Replacement cost coverage

Replacement cost coverage is a bit simpler to understand than actual cash value. If you have a homeowners policy that covers your roof on a replacement cost basis, the insurance company is agreeing to pay you what it would cost to replace your roof with a comparable new roof. Your claims adjuster will research new roofing materials that are comparable to what you have on your home now and offer you a settlement based on what it would cost to replace your roof with a similar new roof. Your claims adjuster will base their assessment on new roofing materials that are comparable to what you currently have and offer you a settlement for what it would cost to replace your roof with these materials.

Replacement cost coverage generally costs more than actual cash value coverage, but it typically means that your deductible could be your only out-of-pocket expense if your roof is damaged. If your roof is newer or in good condition, you may be able to insure it with replacement cost. Some companies will automatically assign replacement cost coverage to your roof based on its age, or you may be able to choose between actual cash value and replacement cost.

Guaranteed or extended replacement cost coverage

The most expensive roof coverage option is guaranteed or extended replacement cost coverage. This endorsement is usually offered for newer homes and typically applies to your entire Coverage A/dwelling amount, not just to your roof.

Extended replacement cost coverage is usually represented as a percentage, such as 125 percent or 150 percent. This means that you have coverage in excess of your Coverage A limit. If your home is insured for $100,000, which includes your roof, and you have 125 percent extended replacement cost coverage, you actually have $125,000 in coverage, should the $100,000 not be enough for your damages.

Guaranteed replacement cost coverage is similar, except that there is no percentage limit. If you have this coverage on your policy, your insurance company agrees to pay the full replacement cost coverage for the damages to your dwelling, even if it exceeds your coverage limits. If your policy has a $100,000 limit and you have to rebuild your entire house after a tornado, for example, your insurance company will pay the full rebuilding cost, even if it is well over the $100,000 limit.

These coverage options may not be available from all insurers or for all customers. The age of your home, its condition and your coverage limit will all affect your eligibility for these coverage types. For example, many insurance companies do not offer guaranteed replacement cost on homes with a dwelling limit in excess of $1 million because it could be financially devastating for the insurance company to pay out a guaranteed replacement amount on such an expensive home.

Actual cash value vs replacement cost coverage for your roof

There are several factors to consider when deciding how to insure your roof. First, what options is your insurance company giving you? Based on the age of your home and your roof’s condition, your insurer may automatically assign a certain coverage type to you roof, taking the decision out of your hands. For example, an insurance company is not likely to not cover a 40-year-old roof on a replacement cost basis, since the roof is probably in poor condition.

If you do have a choice between actual cash value and replacement cost coverage, you will need to consider several aspects of your financial situation to determine coverage. You may want to choose ACV coverage if you do not have the funds to pay for replacement cost, which is likely to be a more expensive choice. However, if you do choose ACV coverage, be aware that you will likely pay more out of pocket after a claim, since your insurance company will not cover the depreciation on your roof. You may want to consider if you have the finances to comfortably pay for a larger portion of a roof claim.

If you have the option and the budget, replacement cost coverage could be a good choice, since it provides you with a greater level of protection against the costs of replacing or repairing your roof after wind damage.

Frequently asked questions

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    Is roof insurance included in your homeowners insurance policy?

    Yes, roof insurance is included as part of most standard homeowners insurance policies, which means your roof is generally covered. Common sources of roof damage include fire, wind, hail and certain types of water damage. However, specific perils can be excluded from your policy. For example, earthquake damage is commonly excluded. If your roof suffers damage in an earthquake, you’d likely need an earthquake endorsement or a separate policy to cover the damages.

    Insurance policies also do not provide protection for general maintenance of roofs, such as wear and tear. If your roof is in poor condition or past a certain age, your insurance policy may not cover it at all. Talking to your licensed insurance professional is a good way to determine how, and if, your roof is covered.

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    How is roof damage covered if it is caused by a hurricane?

    In hurricane-prone states among the Atlantic and Gulf coasts, windstorm coverage is typically included as part of your standard homeowners policy but has a separate deductible which ranges from 1 percent to 5 percent of your property’s insured value. Thus, a roofing loss sustained during a named tropical cyclone is subject to this deductible.
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    Can you switch from actual cash value to full replacement cost?

    You may have the option to choose replacement cost coverage or actual cash value coverage, but it depends on the insurance company, as well as your roof’s age and condition. If your roof is past 15-20 years old or in poor condition, your insurer may automatically cover it on an actual cash value basis and you may not have the option to choose replacement cost. Similarly, some homeowners insurance policies automatically cover newer roofs for replacement cost.
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    Will insurance companies cover an old roof?

    Whether or not an old roof will be covered depends on the insurer. Many companies have restrictions in place on the age of roofs covered by their policies. For example, a lot of companies will restrict how roofs that are older than 15 to 20 years old are covered, and in many cases will only offer actual cash value coverage for an older roof. In most cases, the insurance company will inspect the property and decide if they will insure the home and the roof. For example, if the roof is 15 years old and does not have significant damage, it is more likely to be covered by standard insurance. On the other hand, older roofs with damage due to old age may not be covered.  If you have an older roof, it may benefit you to work with a licensed insurance professional who can get quotes from a variety of insurance companies and help you to find coverage.