Actual cash value or replacement cost: which roof did you insure?

When hail takes a roof, the insurer does not simply pay for a new one. It pays according to the loss settlement terms of your policy, and for a roof those come in two flavors: replacement cost and actual cash value. Most homeowners assume they have the first. A growing number of Texas policies apply the second to the roof, sometimes without the owner noticing at renewal.

This guide explains both with the Texas Department of Insurance's own worked example, so that when you read your declarations page you know what the words mean. We are roofers, not adjusters or agents; the point of this page is that you understand your policy before the storm rather than during the claim.

Replacement cost coverage pays to repair or replace the damaged part of your home at today's prices, for like kind and quality, minus your deductible. If the roof costs $10,000 to replace and your wind and hail deductible is $4,000, the insurer's share is $6,000.

In practice it arrives in two payments. The first is the actual cash value of the roof (see below) minus the deductible. The second, the held-back depreciation, is released when the work is finished and the insurer has the completion certificate and the invoice. The Texas Department of Insurance describes the two payments the same way: the first minus depreciation and your deductible, the second for the depreciation once the work is done.

Actual cash value coverage pays replacement cost minus depreciation. Depreciation, in the Department's words, is a decrease in value because of wear and age. An asphalt roof is treated as a wearing part with a set life; every year takes a slice off what it is worth, and on an actual cash value policy that slice is simply gone.

The important difference is that there is no second payment. The depreciation is not held back; it is deducted. On an old roof it can be most of the claim.

The Texas Department of Insurance uses this example on its consumer pages. A house insured for $200,000 has a 2% wind and hail deductible, so $4,000. A new roof costs $10,000.

On the replacement cost policy the roof's age changes nothing: $6,000 from the insurer, $4,000 from you, whether the roof is five years old or twenty. On the actual cash value policy the twenty-year-old roof is worth exactly the deductible, so the insurer pays nothing and the homeowner buys the whole roof. As the Department puts it, policies with actual cash value coverage cost less, but they also pay less when you have a claim.

On a replacement cost policy the depreciation is called recoverable because you can get it back. The conditions are ordinary but strict: the work has to be done, usually within a time limit written in the policy (often a year or two from the date of loss), and the insurer has to receive the invoice and completion paperwork. Then the held-back amount is released.

Three practical consequences:

• If you take the first payment and never replace the roof, the depreciation is never paid. The first payment was the actual cash value; you have been paid as if you had the cheaper policy.
• If the contractor's final invoice is lower than the insurer's estimate, the insurer pays the lower figure. The depreciation is recovered against the real cost, not the estimate.
• Your deductible is settled in this arithmetic. It comes off the first payment; the second payment is the depreciation, and the insurer may ask for proof you paid the deductible before releasing it.

We send the completion certificate and the final invoice the day the QualCheck is signed, because the second payment does not move until they arrive.

Here is the part that catches Texas homeowners. A policy can be replacement cost for the house and actual cash value for the roof. It is done with an endorsement, a page attached to the policy that changes how roof losses are settled, and it has become common on homes with roofs past a certain age, often ten or fifteen years, and in the counties that see hail every spring.

There are two shapes to look for:

• An actual cash value roof endorsement. Wind and hail losses to the roof surface are settled at depreciated value. The house is still on replacement cost; the roof is not.
• A roof payment schedule. Instead of calculating depreciation, the policy pays a fixed percentage of replacement cost by roof age and material from a table: for instance the full amount in the first years, then a smaller share every few years, down to a small fraction for a roof past twenty. The roof payment schedule guide walks through one.

Either one can be added at renewal. The declarations page lists every endorsement by form number and title; if one of them mentions the roof, read it, and ask your agent to explain the settlement in dollars for your roof at its current age.

1. Read the declarations page. Find Coverage A, the wind and hail deductible, and every endorsement that names the roof.
2. Ask one question of your agent: "If hail destroys my roof this year, in dollars, what does this policy pay, and what do I pay?" Ask for the answer in writing.
3. Know the age of your roof. If you do not, the free Roof Grade puts it in writing with the evidence, and the report is exactly what an insurer or a buyer wants to see.
4. Do the arithmetic before the storm. A fifteen-year-old shingle roof on an actual cash value endorsement is insured for a fraction of its replacement cost, and it is entering the years when hail claims are most likely. Replacing it on your own terms, before the storm, with a Class 4 shingle that earns a discount, or a metal roof that does not depreciate the way asphalt does, is often cheaper than the claim would be.