Vacant Home Insurace: Be Careful What you are Buying

A big difference in the quality of policies is the difference between a policy that pays on a actual cash value basis "ACV" and one that pays on a replacement cost basis. ACV is defined as replacement cost at the time of loss minus physical depreciation. Replacement cost is the amount it would cost to replace the property at the prices in effect on the date of losss. Depreciation is the cost of wear and tear on the property.

A policy that pays on a replacement cost basis will replace damaged property wtih like kind and quality without taking into account depreciation, and is therefor superior.

A policy may also call for losses to be paid on a functional replacement cost basis. Functional replacement cost is just an alternative form of valuation of property that is used in some insurance policies. It is used when the original insured property can be replaced with a functionally equivalent property, but not physically idential, at a lower cost. This is a step up from ACV but not as good as a full replacement cost policy.

Most vacant homeowners (or vacant dwelling) policies are ACV and the buyer must be wary.