Two houses on the same street, both hit by the same hailstorm, both with the same insurer. One owner receives enough to replace the roof. The other receives roughly half. The difference is usually not the damage. It is four words on a policy schedule that neither of them read when they signed.
This article explains actual cash value and replacement cost value, how depreciation is actually calculated, what a roof schedule endorsement does, and how to find out which one you have in about three minutes.
We buy houses, including storm damaged ones, so read the last section knowing that. We are not insurance advisers, brokers or adjusters. Policy wording varies enormously between carriers and this is general orientation. For your own policy, speak to your agent.
The two ways a loss gets valued
Replacement cost value
Pays what it costs today to replace the damaged property with materials of like kind and quality, without deducting anything for the age or condition of what was there.
A fifteen year old roof destroyed by hail is replaced with a new roof. You get a new roof for an old roof, less your deductible. That is the whole point of it, and it costs more in premium accordingly.
Actual cash value
Pays replacement cost less depreciation for age and condition.
The same fifteen year old roof on a policy with a twenty year expected life is treated as having used up a substantial share of its life. That share is deducted. What arrives is the depreciated value, less your deductible.
On an older roof, actual cash value can pay less than half of what replacement actually costs, and the policy is working exactly as written.
How depreciation is actually calculated
The general principle is straightforward even though the detail varies. The insurer establishes an expected useful life for the component, works out how much of that life has been used, and reduces the payment proportionally.
A simplified illustration, and your policy governs rather than this:
The arithmetic, illustrated
- Replacement cost of the roof: $18,000
- Expected life used in the calculation: 20 years
- Age of the roof: 15 years
- Depreciation applied: roughly 75%, so about $13,500
- Actual cash value: about $4,500
- Less a 2% wind and hail deductible on a $300,000 dwelling: $6,000
- Payment: nothing
That last line is not an error and it is not unusual. On an older roof with a percentage deductible, an actual cash value settlement can come to zero.
Some policies apply depreciation on a straight line basis as above. Others use schedules that depreciate more slowly in early years. Some treat different components differently, so the shingles depreciate but the labour does not. Ask your agent which applies to your policy rather than assuming.
Recoverable depreciation, and the cheque people miss
This is the part that causes the most avoidable loss, and it only applies on replacement cost policies.
On a replacement cost policy the payment usually arrives in two parts. The first is the actual cash value, paid up front. The second, the withheld depreciation, is released once the work is actually completed and you submit proof of it.
Homeowners who receive the first cheque, conclude the settlement was inadequate and never complete the work, never receive the second part. The money was there. It was conditional on doing the repair.
There is usually a time limit for claiming it, frequently stated in the policy, and it is worth knowing what yours is before you decide to leave the roof alone.
Our article on hail damage in Oklahoma covers the wider claims process this sits inside.
The roof schedule endorsement
Here is the thing that surprises people most, and it is worth checking your own policy for specifically.
A policy can be replacement cost for the dwelling generally while carrying an endorsement that applies actual cash value, or a depreciation schedule, to the roof specifically. Some endorsements apply full replacement cost for a roof under a certain age and switch to actual cash value beyond it.
These have become considerably more common in hail exposed states over the past decade, and they are frequently added at renewal rather than at purchase. A homeowner who bought a replacement cost policy in 2016 may not have one in 2026 for the part of the house most likely to be damaged.
Look on your declarations page for anything referencing roof surfacing, wind and hail, or a depreciation schedule. If you cannot tell, ask your agent directly: is my roof covered on replacement cost or actual cash value, and does that change with age?
Finding out which you have, in three minutes
- Find your declarations page, the summary document at the front of the policy. It is usually emailed at renewal
- Look for "Coverage A" or "Dwelling", and next to it the loss settlement basis: replacement cost or actual cash value
- Look separately for any roof endorsement. This is where the surprise lives
- Check your wind and hail deductible. If it is a percentage rather than a flat sum, work out the dollar figure now
- If any of that is unclear, ring your agent and ask the question in the words above
Is replacement cost worth the extra premium?
In a hail region, for most homeowners, the arithmetic usually favours it, and it depends on your situation rather than on a general rule.
It favours replacement cost when the roof is older, you could not fund a five figure replacement from savings, the house is your main asset, or you intend to stay long enough that a hail event is statistically likely.
It matters less when the roof is nearly new, you have the reserves to cover a shortfall, or the premium difference is genuinely large relative to your budget.
What is worth doing either way is knowing which one you have, because the worst outcome is assuming replacement cost and discovering actual cash value after a storm.
Two things that reduce the premium either way
- Impact resistant roofing. Materials are rated for impact resistance, with class 4 the highest common rating, and many Oklahoma carriers offer a discount for them. Over the life of a roof this can offset a meaningful part of the extra material cost
- A higher standard deductible in exchange for a lower premium, which is a reasonable trade if you have the reserves and a bad one if you do not
This is not only about roofs
The same distinction applies across the policy, and roofs are simply where it bites hardest because they are what hail hits.
Contents coverage is frequently actual cash value by default, which is why a ten year old sofa destroyed in a fire pays out at ten year old sofa value rather than at what a replacement costs. Replacement cost contents cover is available and costs more.
Fences, sheds, driveways and detached structures are all subject to the same treatment, and on acreage the total across outbuildings can be substantial. Our article on why outbuildings do not appraise covers a related problem from the valuation side.
What this means if you end up selling
Our interest, stated plainly.
A homeowner with an actual cash value settlement and a five figure shortfall has a specific problem. The roof cannot be replaced, and a compromised roof means a mortgage lender will not fund a purchase, which removes almost every buyer before the house is listed.
That is the situation we buy in, and it is covered on our page about selling a storm damaged house. Insurance proceeds you have already received generally stay with you, though a mortgage lender named on the claim may be holding them and some policies direct proceeds differently on a sale. Establish both before agreeing a price.
What we would say first is: exhaust the claim before you decide anything. Supplements, reinspections and the appraisal clause all exist, and we would rather you got everything the policy owes you and then chose, than sold early and left money with the insurer.
The short version
Six things worth knowing
- Replacement cost pays for a new roof. Actual cash value pays for an old one
- On an older roof with a percentage deductible, an ACV settlement can come to nothing
- Recoverable depreciation is released after the work is done. Not doing the work forfeits it
- A roof endorsement can apply ACV to the roof on an otherwise replacement cost policy
- These endorsements are frequently added at renewal, not at purchase
- Three minutes with your declarations page tells you which you have
Frequently asked questions
What is the difference between actual cash value and replacement cost?
Replacement cost pays what it costs today to replace damaged property with like kind and quality, without deducting for age. Actual cash value pays replacement cost less depreciation for age and condition. On an older roof the difference can be more than half.
How is depreciation calculated?
Generally by establishing an expected useful life for the component, working out how much of that life has been used, and reducing the payment proportionally. Methods vary between carriers, so ask your agent which applies to your policy.
Can an actual cash value settlement really come to nothing?
Yes, and it is not unusual. On a fifteen year old roof with heavy depreciation and a percentage wind and hail deductible, the depreciated value can be less than the deductible, so nothing is payable. The policy is working exactly as written.
What is recoverable depreciation?
On a replacement cost policy, the portion of the settlement withheld until the work is actually completed and documented. You submit proof of the finished repair and the carrier releases the balance.
What happens if I never do the repair?
You never receive the recoverable depreciation. The money was available and conditional on doing the work. There is usually a time limit for claiming it, stated in the policy, and it is worth knowing yours before deciding to leave a roof alone.
Why was my first cheque so small?
Usually deductible plus withheld depreciation. On a replacement cost policy that first payment is the actual cash value and the rest is waiting on completed work. Check whether a second payment is due before concluding the claim was underpaid.
What is a roof schedule endorsement?
An endorsement that applies actual cash value, or a depreciation schedule, to the roof specifically, even where the policy is replacement cost for the dwelling generally. Some apply full replacement cost under a certain roof age and switch beyond it.
Why would my coverage change without me doing anything?
These endorsements have become considerably more common in hail exposed states and are frequently added at renewal rather than at purchase. A policy bought years ago may not have the same roof treatment today.
How do I find out which I have?
Find your declarations page, look for Coverage A or Dwelling and the loss settlement basis, then look separately for any roof endorsement. If it is unclear, ask your agent directly whether the roof is covered on replacement cost or actual cash value.
What is a percentage deductible?
A wind and hail deductible expressed as a percentage of the insured value rather than a flat sum. On a house insured for $300,000 a two percent deductible is $6,000. Work out the dollar figure now rather than after a storm.
Is replacement cost worth the extra premium?
In a hail region the arithmetic usually favours it, particularly where the roof is older, you could not fund a five figure replacement from savings, or the house is your main asset. It matters less on a nearly new roof if you have reserves.
Can I switch from ACV to replacement cost?
Ask your agent. Availability depends on the carrier and on the condition and age of the roof, and some carriers will not offer replacement cost on a roof past a certain age. Asking costs nothing.
Do impact resistant shingles reduce my premium?
Many Oklahoma carriers offer a discount for roofing rated for impact resistance, with class 4 the highest common rating. Over the life of a roof that discount can offset a meaningful part of the extra material cost. Ask what discount applies before choosing materials.
Does this apply to anything other than the roof?
The same distinction applies across the policy. Contents coverage is frequently actual cash value by default, which is why an older sofa pays out at older sofa value. Fences, sheds and detached structures are treated the same way.
What about my contents?
Check whether contents are covered on actual cash value or replacement cost. Replacement cost contents cover is available and costs more. On a total loss the difference is very large and most people have never checked.
Should I raise my deductible to save premium?
It is a reasonable trade if you have the reserves to cover the higher deductible and a bad one if you do not. The point of insurance is the loss you cannot absorb, so a deductible you could not actually pay defeats the purpose.
What if I disagree with the depreciation applied?
It can be raised as part of a supplement or a reinspection request, and most policies also contain an appraisal provision for disputes about the amount of loss. Documentation of the roof's condition and maintenance history helps.
Does maintenance history affect depreciation?
It can, because depreciation reflects condition as well as age. Keeping invoices for roof work is worth doing for exactly this reason, and it also helps at sale.
What if I cannot fund the shortfall?
Exhaust the claim first through supplements, reinspection or the appraisal clause. If a genuine gap remains, the options are funding it, partial repair which usually leaves the property still unfinanceable, or selling with the damage disclosed.
Can I sell a house with an unrepaired roof?
To a cash buyer, straightforwardly. To a financed buyer it is difficult, because a lender will not fund a purchase where an appraiser or inspector flags the roof and the buyer cannot fund repairs on a house they do not own.
Who keeps the insurance money if I sell?
Proceeds already paid to you generally stay with you. A mortgage lender named on the claim may be holding or staging them against completed work, and some policies direct proceeds differently on a sale. Establish both before agreeing a price.
Should I settle the claim before selling?
Usually yes. Supplements, reinspections and the appraisal clause all exist, and we would rather you got everything the policy owes and then chose than sold early and left money with the insurer.
We buy houses, including storm damaged ones, so read the section on selling knowing that. We are not insurance advisers, brokers or adjusters. Policy wording varies enormously between carriers and this is general orientation. For your own policy, speak to your agent.