Replacement Cost vs Actual Cash Value: Is Your Rental Insurance Leaving You Underinsured in 2026?

Replacement costs versus actual cash value and why your rental property insurance may be leaving you dangerously underinsured in 2026. So hi, my name is Mendell Gosnell, owner and founder of Centurion Real Estate Management. If you've owned real estate for a while and looked at your insurance statement recently, you've probably been shocked to see the costs go up significantly. And one of the reasons that we're seeing— I think there's a number of factors, but one of them is for a long time they have kind of underpriced, and with the surge in values, the insurance companies are playing catch-up, and so they've had to increase their rates for the exposure that's out there. I think there's a number of other reasons, but I won't get off on those tangents today. So home values and construction costs have skyrocketed over the past few years, Yet many rental property owners are still carrying the same insurance limits that they bought years ago. And so insurance premiums have risen sharply. I'm speaking personally, I've seen just about all of my insurance rates go up at least 20%, some over 50%, which is significant. I've heard stories and seen some of our clients that have experienced even larger increases, almost double in some instances. And that's here in Oregon. Policies can run like on a single-family home, $800 to $3,000 per year for a typical single-family rental, with even steeper jumps in some of the high-risk states. But the coverage itself often hasn't kept pace. And so the result is a growing number of landlords, discover too late that they're underinsured. Really, it's good that the rates have gone up to make sure that your coverage is adequate, but sometimes those just lag behind. And so you'll definitely want to reevaluate on your own your rental insurance policy and make sure that the values that you're being insured for are actually going to be able to cover In the event of a claim, like your property burns down, and you know you have a policy amount to cover a value on your property that is a value many years old, and the value or the replacement cost of that property is a lot more than your policy is insured for. So it is important. I mean, it is a bummer that the rates have gone up, but there is just a necessity and very practical. reason for it in part. At the heart of this problem is just one critical choice that most rental owners really never think about, and that's the actual cash value, or the ACV, versus the replacement cost value, or the RCV. And that coverage is, is different, and it's a very important distinction. So understanding that difference is how depreciation works. And it really could save you tens or even hundreds of thousands of dollars after a fire, storm, or major loss. What's the difference? What's the difference between the actual cash value policy or replacement cost coverage? So if you look at your policy, you talk to your insurance agent, figuring out what kind of policy you have and then understanding if that's suitable for your situation. And these 2 terms determine exactly how much your insurer will pay when something goes wrong. So actual cash value, this is the cheaper option and the default of many older landlord policies. But the payout for those insurance policies is the, you know, current replacement costs minus depreciation minus your deductible. So for instance, your 15-year-old roof that would cost $20,000 to replace today might only be worth $8,000 after depreciation, and that's what you would get. So it's good to know that. And so again, that might be suitable for you. You might take the gamble. You might say, hey, you know what, I want to pay the, the lower cost, and at least I'll get something for my insurance if an accident happens. But knowing that you're not going to be fully covered is super important, and a lot of owners get blindsided by that a little too late when an accident happens and they file a claim and they realize their insurance is not going to cover all of the damage. So in contrast, the replacement cost value, or the RCV— so this is the stronger and usually more expensive option. And the payout is full cost to repair or replace new materials of like kind and quality, no depreciation. And so, you know, same roof, you get the full $20,000 minus your deductible. And again, having a conversation about the deductible, not exactly what this video is for, but just as a side note and important as we're trying to educate our clients, you have options. A lot of times they'll quote you a policy and they'll say, hey, your deductible is $2,500 or $5,000. Um, one of the things that I do, and I recommend to clients that have a strong portfolio, a strong reserve, and want to conserve cash flow, is to go with a higher deductible, or maybe the highest deductible that's allowed by the— your carrier. That brings your premium down. And so looking at what those options are is another way that you can still have maximum coverage in the event of an issue. But while you're just paying year after year your insurance premium, that premium is going to be lower. But in the event of an issue, your deductible is going to be higher. So something to know about. And this is a good tactic, especially if you have multiple rentals. You know, you have a a sizable portfolio can be a great strategy because you're essentially self-insuring some of that risk across your portfolio. You can actually rebuild to today's standards. So with that secondary type of policy, that actual replacement value. So many landlord policies start with the ACV on the building and contents and then upgrading to the RCV, the full replacement value. And it's often an endorsement or policy option you have to request. So again, if you just ask for a policy from your insurance agent, they might not ask you these questions. So you kind of have to know, you have to know the right questions to ask and have a conversation with your insurance agent. That's also a great reason why you want to develop relationships with these professionals, professionals in the industry. And so it can raise your premium noticeably, but in today's market, the extra protection might be worth it to you. So everybody's case can be a little bit different, but knowing in advance so that you know what you're deciding on, certainly a better strategy than waiting until the end and not, not really realizing what coverage you have or don't have. How insurance companies handle depreciation. And why it hurts rental owners. So depreciation is kind of the silent killer of claims. It's a great benefit for real estate investors. You get that deduction against taxes, but when it comes to insurance, it actually works against you. So insurers use age, condition, and expected useful life to reduce what they owe. So for instance, a roof Often depreciated between 20 to 30 years. Stuff like siding or flooring, 15 to 25 years. Appliances and HVAC, 10 to 15 years. These all are going to be evaluated by or determined by your policy. And again, probably something that you want to have a specific conversation with an insurance agent. Again, I'm just talking kind of in broad strokes on these things. Cabinets and fixtures, are going to have a lower depreciation timetable. Maybe a way to kind of frame this a little bit would be thinking in terms of a real-world example. So many landlords face, after a kitchen fire or water damage, costs to replace the kitchen cabinets and counters with new materials, let's say $15,000. Under the ACV, insurer might say, hey, 12-year-old cabinets are 60% depreciated, so you're only going to receive $6,000. Compare that to the more expensive policy where they're doing the replacement cost, so that what it's going to cost to replace it, you'd receive the full $15,000, or the insurer, you know, pays the ACV first, then sends the remaining recoverable depreciation once you show the proof of repair. So there's a number of ways this might be handled. you want to check your policy or have that conversation with your insurance agents— agency and ask those questions and kind of really understand what your policy covers and what it doesn't. Rental properties are especially vulnerable because many were built decades ago and have tenant turnover and wear. And when owners choose the ACV to save a few hundred dollars or, you know, a year on premiums, They're really a lot of them don't know that they're accepting that risk. So in the event that something happens again, they get blindsided with that huge depreciation deduction and a small check from the insurance for these this big repair costs. And so why so many rental owners are underinsured right now is in large part, as I mentioned earlier, the construction costs. So labor, material. Roofing materials, everything across the board, the costs have just gone up. They've risen really dramatically since kind of going back to 2020 with COVID I think everyone really just saw like it was what's gonna happen. And then unexpectedly, just the— we had a boom in construction and that really increased prices and never looked back. So rebuilding a home today, often costs 30 to 50% more than it did even just 5 years ago, and in some instances even more, far, far more than just simple market value appreciation. And yet most policies are renewed automatically with the same dwelling limits. And so if your policy still says $250,000 to rebuild but current costs to actually rebuild your home or rental might be $380,000 or even more, then the reality is you're really underinsured. So many policies also contain a coinsurance clause, typically 80%. So if you're insured for less than 80% of the true replacement cost, The insurer can reduce your claim payout proportionately. So again, what does this mean? Check with your insurance agent, have a good conversation, tell them to kind of educate you a little bit on this. But the, the most important thing to understand is there's different types of policies, and you— the last thing you want to happen is to find out too late that you're just really uninsured. You might You might still choose that, but at least you know, hey, if there's an accident that happens or an issue and I file a claim, I've got to have some reserves to be able to cover that. So you'll want to add in the fact that landlord insurance premiums themselves have climbed significantly. And again, I haven't really talked to too many people that haven't seen an increase. And I think the— What I'm seeing myself in my sphere is 20% or more annual increases is pretty common. And many owners have been forced to raise deductibles or accept lower limits just to keep the policies affordable. And that's an okay strategy, or, you know, but again, something you want to be aware in advance so you're not blindsided. And the result is a perfect storm. What we're seeing, these higher premiums, outdated coverage limits, CV depreciation, which results in a claim that doesn't come close to covering the damage. What really happens is when you file a claim, the issues no one talks about is the rental property claims are more complicated than standard homeowners claims. Here are the most common painful surprises owners face. Again, just to kind of recap. Number 1, depreciation disputes. Adjusters often depreciate more aggressively than owners expect. Surprise, surprise. And then there's fights over the useful life of components. You might say, gosh, I thought this was a 30-year roof, and they might say, no, it's a 20-year roof. So, and that can delay some payments. You have the ability to appeal or, you know, push back. I've done that myself a number of times with claims, and I go back and forth. And so having good representation, having a good relationship with your insurance agent to kind of go to bat for you and educate you. Super important. Having a good property manager that knows some of these things, at least in part. Also, what's covered versus what's not. Usually covered things like fire, wind, hail, lightning, theft, you know, sudden water damage or burst pipes. But there's a lot of exclusions in your policy, and it's just good to be aware. Like in the Pacific Northwest, a lot of policies just exclude mold issues, for instance. So if your tenant has a mold issue, a lot of policies are just going to exclude those, a standard policy. Other things that are often excluded are like floods, so you need to get special flood insurance, and/or earthquake. Again, mold, gradual wear and tear, or tenant belongings. So we highly recommend that you Have your tenants get their own insurance policy so that if things happen, then they're covered. Intentional damage by the tenants, you know, that is not generally covered by most insurance policies. A lot of things to think about. I'm trying to keep this video short, but also trying to give everybody a really good summary of some of the things to really, you know, think about when you're evaluating insurance. The great thing is, is you have this conversation, set it and forget it, but a lot of people haven't even thought about it. They don't even know these things. And so it's good to be educated. Uh, loss of rental income— this might be something that you might think about, like, gosh, I'm paying my mortgage and I really need this rental income. And so those are generally not included, but you can add them as riders on your policy. It will cost more but might be something that you want to mitigate that risk and it's important to you. So something to think about. And again, you know, you can just say, hey, how much does it cost more for me to add this extras on my policy? Underinsurance penalty— if you're underinsured, you become kind of your own co-insurer and you pay a percentage of every dollar of loss. So recoverable depreciation delays, again, we talked about that, how everything happens once you start the repairs. You might have to start them before you get cash from your insurance policy. So just a lot of things to kind of think, think about in advance, just so you know, and you're not blindsided. Other things, kind of code compliance and upgrades. You know, a lot of properties are older and they're grandfathered in right now. But if something happens and you have to repair or replace or rebuild, You're going to be held to these new code compliance standards, and those are more costly. So older rentals often need expensive modern upgrades— plumbing, electrical, accessibility, easements, egress— all of those things come into play and can be really expensive. What should you do right now? Don't wait for a loss to find out. You know, you should really start thinking about these things. You're doing the right thing watching this video and maybe taking some notes and watch it again and call your insurance agent for a current, you know, evaluation on your, your insurance and have— ask them these questions and say, hey, I need to evaluate these things. What am I likely going to face in the event of a claim and what are my options? And you may think about adding some things to your policy, getting a different policy Um, you know, trying to save some on your premiums by raising your deductible. So there's a lot of things to think about, and it's just going to be kind of based on your risk tolerance, your current situation. Better to know and make that decision in advance so you know what to expect, just comparing the options out there so you make an educated decision. I think that's probably enough information overload here, but the most important thing is again Not something that we think about a lot, but when an event like this happens, having gone through it, been in this business for over 20 years, and when it does happen, it can be pretty stressful, and there's just a lot of angst with just the situation in general when you're seeing a big issue, tenants are frustrated, you've got a lot of people, a lot of moving parts, and then to realize, gosh, I got to come out of pocket for my deductible. I didn't realize that. I gotta, you know, I gotta come out of pocket for getting these things going. Oh, I don't have any rental income. My policy doesn't cover that. And then you're fighting with the adjusters and you're trying to figure out why you're getting blindsided with these huge depreciation costs. So best to know in advance, have that conversation every few years. Probably should reevaluate your, your policy, especially in markets where there's huge changes like we've seen with the values going up so much and just those policies kind of auto-renewing again leaves a gap in coverage. I think that covers everything. We try to stay up on these things. In part, we're not insurance agents, but we deal with it a lot, and so we know enough about these things to have good conversations with insurance agents and to educate our clients, at least to encourage them to ask these types of questions. We hope this has been helpful. If you have other questions, we'd love to have a conversation with you, and thanks for watching.