At TWIA, our goal is to pay you, the policyholder, everything you are owed under the terms of your policy for your claim. There are several factors that affect how much we can pay for a claim. These include the amount of insurance provided by the policy, the damaged property’s depreciation, and the policy’s deductible amount.
Insurance to Value – Actual Cash Value vs. Replacement Cost Value
A common insurance industry practice, Insurance to Value (ITV) is a method used to calculate the amount of insurance provided by the policy. Insurance to Value is expressed as a percentage. To have an Insurance to Value of 80% means that the amount of insurance on the property is 80% of the cost to rebuild or replace it.
When a property is insured through TWIA with an Insurance to Value of 80% or more, it is considered to have replacement cost coverage. When a property is insured to a value below 80%, it is considered to have actual cash value coverage. This distinction (replacement cost coverage vs. actual cash value coverage) determines whether or not the damaged property’s depreciation is factored into TWIA’s final claim payment amount.
How Depreciation Affects Claim Payments
Depreciation is the reduction in the value of a property with the passage of time, due in particular to wear and tear. It is how much the value of an item has decreased based on its age and condition. Depreciation can significantly reduce the claim payment for actual cash value policies. Depreciation has less significant effects on the final claim payment amount for policies with replacement cost coverage.
For claims on actual cash value policies, depreciation is deducted from what would be the replacement cost amount. What is left is the actual cash value claim payment. This will likely be less than the amount of money needed to fully repair or replace the damaged property with similar new products or material.
For claims on policies with replacement cost coverage, the claim payment amount is determined using the property’s replacement cost value. TWIA pays these claims in at least two parts:
- First, the actual cash value based on the estimated replacement cost minus depreciation.
- Then, any recoverable depreciation after repair or replacement is completed.
- This brings the total payment amount up to the replacement cost, minus any deductible.
How to Identify Your Coverage Type (Actual Cash Value vs. Replacement Cost Coverage)
Replacement cost coverage is provided by endorsements TWIA-802 (dwelling policies) and TWIA-164 (commercial policies). If these endorsements are not included on your TWIA dwelling or commercial policy, your claim will be processed at actual cash value rather than replacement cost value.
Another way is to look up your policy’s Insurance to Value percentage on the policy Declarations page. It is listed under “Coins %” in the Coverages table. If the percentage is 80% or more, your policy provides replacement cost coverage. If the percentage is lower than 80%, your policy provides actual cash value coverage.
We encourage you to contact your agent to confirm your policy type and discuss your coverages.
How Deductibles Affect Claims Payments
Deductibles also reduce the claim payment amount. A deductible is the amount of money the policyholder agrees to pay on a claim “out of pocket” before any payment is due from the insurance company. The policyholder chooses the deductible amount when they buy a policy. For TWIA policies, policyholders can choose a deductible from $500 to 5% of the policy’s coverage level.
The policy’s deductible amount will automatically be subtracted from your first claim payment. If the cost to repair or replace damaged property is less than the deductible amount, you will not receive a claim payment.
Per Texas law, the full replacement cost will not be paid (see How Depreciation Affects Claims Payments, above) unless the policyholder provides proof they paid the deductible. Proof of payment can be in the form of a cancelled check, money order receipt, credit card statement, or a copy of an executed installment plan contract or other financing arrangement that requires full payment of the deductible over time.
How to Identify Your Deductible
You can check your policy’s deductible amount on the policy Declarations page. It is listed in the table Property and Form Description under “Per Item/Per Unit Deductible,” “Amt.” You may also confirm the deductible amount by contacting your agent.
Example Claims Payment Calculations
Below is an example of TWIA claim payments on an actual cash value policy and a replacement cost coverage policy.
|Example Claim Payment Calculations|
$200K coverage | 2% deductible | $20K in TWIA-covered roof damage | 25% depreciation
|Action Cash Value Policy|
Will be less than the amount of money needed to replace damaged property.
|Replacement Cost Coverage Policy |
Will be based on the amount of money needed to replace damaged property.
|$20,000 Cost to replace damage with similar new product or material|
-$5,000 Depreciation (simplified example: roof is 5 years old w/expected 20-year life)
$15,000 Claim amount (this is the Actual Cash Value amount)
-$4,000 Deductible (2% deductible on $200k)
$11,000 Actual Cash Value Claim Payment
This means for $20,000 in covered damage, your claim payment would be $11,000.
|$20,000 Cost to repair or replace damage with similar new product or material|
-$4,000 Deductible (2% deductible on $200k)
$16,000 Replacement Cost Coverage Claim Payment
This means for $20,000 in covered damage, your claim payment would be $16,000.
For More Information
Visit the Insurance Information Institute for more information on Insurance to Value.
Please contact your insurance agent if you have any questions about your policy and the coverages it provides. If you have a TWIA claim you would like to discuss, contact us through our online Claims Center or by calling (800) 788-8247.
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