One of the most important insurance issues you must understand is how you will get paid if you have a claim. Its called the “loss settlement.”
I once heard someone say, that “insurance is a complicated business.” Well, at Gila Insurance we try to keep things simple. But, there are a couple of points that frustrate many consumers when it comes to claims. The first is whether or not something is covered, which we address on numerous places on this site, the second is loss settlement, and the third is valuation. Loss settlement is how the company determines what they will pay you in the event of a loss. The HOW, not the HOW MUCH. How much is important, but the how is the best place to start when determining the how much. There are several different ways a company can determine how they will pay you. The good news is that they tell you how their loss settlement options will work, before you have a claim, and you get to choose how.
Some may try to do the math to see if the discount provided for the ACV option makes sense, and for some it may, but on a larger loss the calculation of depreciation will be damaging to small investors. For larger investors with a diversified portfolio, they may be able and willing to absorb the cash hit. However, even larger investors can get hit hard by Actual Cash Value settlement options on larger losses, especially when roofs, walls, flooring etc., etc. are damaged, all at the same time.
Bottom-line, most investors will be better off with the replacement cost option, which also helps to eliminate confusion and complications when there is a claim.