When you buy commercial property insurance, you have a lot of decisions to make.
You need to choose the right coverage limits for your Residential Care Facility for the Elderly (RCFE). You have to decide if you want to add any riders or endorsements to expand coverage. You might choose to add protections to help you rebuild to local building code or to reimburse you for lost business income after a covered disaster like a fire.
On top of all of this, you’ll be presented with the choice between replacement cost or actual cash value (ACV) coverage. The decision you make here plays a huge role in how your policy pays out after a loss. With that in mind, we want to highlight some things all RCFE owners should know.
To help you decide which type of commercial property coverage best fits your RCFE, let’s look at both options.
Replacement cost
If you choose replacement cost coverage, you get exactly what the name implies.
Say a resident’s mattress gets destroyed in a fire. The replacement cost coverage covers the full cost of replacing that mattress. You can buy it new and your policy should fully pay out to reimburse you.
That’s true even if the mattress costs more today than it did when it was purchased. If you bought it five years ago for $1,200 and it costs $1,300 today, for example, your policy pays out the $1,300.
That seems pretty simple, right? You might wonder why everyone doesn’t go this route since it gives you such a clear path forward after a covered loss. The answer is simple: cost. Replacement cost coverage makes your premiums notably higher than if you choose the alternative, actual cash value coverage.
Actual cash value
Like its counterpart, the name of actual cash value (ACV) coverage tells you a lot about it. This kind of coverage pays out what that destroyed item was actually worth at the time of the incident. That means it takes depreciation into account.
Consider that resident’s mattress ($1,300 to buy new today). Your insurance company factors in depreciation. If they decide the 5-year old mattress was halfway into its lifespan, they’ll determine it was worth $650 at the time of the covered loss. That means your ACV coverage only pays out $650 — leaving you to pick up the other half of the tab.
Avoiding coverage shortfalls
TL;DR: Actual cash value factors in depreciation, while replacement cost covers the full cost of buying an item new today. ACV costs less.
The lower premium with ACV coverage comes at a literal price if you experience a covered loss. That’s particularly true for RCFEs, which tend to have a lot of high-wear items like furniture, kitchen appliances, HVAC systems, and water heaters. If your insurance company gets to factor in depreciation for all of those items, you could wind up with a lot less than you expected.
As a result, we tend to recommend replacement cost coverage to our clients. That said, we know that every facility is different. If you want to talk to an experienced RCFE insurance broker about the right coverage for your needs and your budget, contact our team at InsureMyRCFE at (805) 413-5668 today.
