Tennessee Regulators Say Insurers Weighing Shift in Roofing Policies

Tennessee regulators observed that in recent months, some property/casualty insurers in the state have filed to expand or shift their roofing policy terms to include actual cash value policies. As a result, Tennessee’s Department of Commerce and Insurance is reaching out to consumers to help them understand the difference in coverage.

Regulators explained that:

1. Actual cash value (ACV) policies pay consumers for replacement costs minus any applicable depreciation. Depreciation can be thought of as “wear and tear” or age.
2. Replacement cost policies pay consumers for what the damaged/destroyed item or structure would cost in today’s dollars. These policies do not account for any wear and tear or for the age of the item.

Regulators stated that replacement cost benefits will generally pay more for a claim than will ACV benefits. However, not all dwellings/items will qualify for full replacement benefits – determinations may be made on a situation-by-situation basis as companies inspect properties to resolve coverages they may make available based on the property’s condition and the company’s underwriting guidelines.

For example, regulators asked consumers to consider a hypothetical, $10,000 roof that is now five years old. When assuming that the roof needs to be replaced entirely and the homeowner has a $1,000 policy deductible:

• Under an ACV policy, the insurance company may determine that $500 of wear and tear/depreciation occurred each year since the roof was installed. At the time of the claim, the company would pay $6,500. Depreciation would have reduced the payment by $2,500 (5 years multiplied by $500 wear and tear per year) and the $1,000 deductible would also reduce the payment. The consumer would choose between making up the difference to pay for a roof of similar quality, or using the money to install a roof available at that price.

• Under a replacement cost policy, the insurance company would pay the amount required to replace the roof with similar-quality materials at today’s cost, minus the deductible. In the event that the same roof costs $11,000 at the time of the claim, the company would pay $10,000-$11,000 for the replacement roof, minus the $1,000 deductible. (Note: Insurance companies may initially pay the actual cash value for the roof, $6,500 and then reimburse the difference following submission of a receipt.)

Regulators advised that Tennessee insurance consumers should not feel that they must accept or keep a policy that does not cover their needs. Regulators encouraged consumers to shop around when seeking a policy and at renewal to ensure that they receive the coverage that they want at a price that they can accept. Consumers should also read their policies to better understand their coverage terms and should feel free to ask questions to agents and brokers.