Imagine the worst: Your RV and all its contents are totally destroyed in a car accident or vehicle fire. What happens now? Will you be able to replace your RV so you can hit the road again?
That’s the question that everyone who suffers a loss like this has at claim time. But too often, consumers are caught by surprise when they suffer an insurable loss, present their claim, and receive a check for much less than they expected – and certainly much less than they need to replace their lost RV and the property in it.
Why does this happen? Many consumers get blindsided by depreciation. They don’t realize that their insurance policy does not protect them against the gradual loss in value that affects any vehicle on the road.
Fortunately, it is possible to protect yourself from the effects of depreciation should destruction or theft occur to your RV. The key lies in understanding the specific language your insurance policy uses to define reimbursement. If you don’t want to get blindsided by an unexpectedly low reimbursement at claim time, it’s critical to understand the language your policy uses.
Actual Cash Value Policies
Many policies define your eventual reimbursement using an “actual cash value” definition. Simply put, this means that they’ll subtract depreciation before they cut you a check. This depreciation can amount to tens of thousands of dollars over time, which potentially means your settlement check is tens of thousands of dollars lower than what you were counting on to replace your RV.
Imagine you buy a new RV with a MSRP of $75,428.57. You don’t pay quite that much, though – Perhaps you paid $60,000 for it. But as soon as you drive it off the lot, the new value of the vehicle falls about 30 percent from MSRP. Which means your brand new SUV is really worth $50,000.
After one year, however, your insurance company may depreciate the vehicle by another 18 percent, or $9,000. If you total the vehicle a year after you bought it, you wouldn’t get a check for $60,000. Instead, it might be closer to $41,000.
After another year, they’ll deduct another 10 percent from the actual cash value of the vehicle – or $4,100. In this case, you wouldn’t get a check for what it would cost to replace your vehicle, but for perhaps $36,900.
Every year that goes by, you would receive less money if you had to replace the vehicle. After about five years, you would receive only about half of what you paid for the vehicle originally. That is, after totaling the RV, you’d only receive $30,000 of the $60,000 you paid originally.And then you subtract your deductible from that.
Every carrier is going to do the math slightly differently, but the basic principle is the same: If you have an actual cash value policy, the insurance carrier subtracts an estimate of the depreciation of the vehicle from what you paid to come up with the actual cash value, or ACV. And yes, many home insurance policies work the same way.
The advantage to this method of calculation is this: All things being equal, it requires lower premiums. It’s quite simple – you get less protection, so you pay less in premiums.
The disadvantage, of course, is that unless you have been exceptionally diligent in saving money to replace the RV (and its contents and accessories!), you will not be made whole by your eventual reimbursement at claim time. Your check will not be enough to put you back on the road in the same style and comfort level you had before.
And here’s the brutal mathematical truth: It is nearly impossible to make up the gap during the first five years just by saving and investing the difference in insurance premiums; that’s why many people prefer a full replacement value policy.
Full Replacement Cost
When it comes to claim time, the better policy to own is a full replacement cost policy – sometimes called a ‘full replacement value’ policy or ‘total replacement cost’
With this kind of policy, your premiums will be somewhat higher, but the insurance company will not deduct depreciation from your settlement check. In the RV world, instead you’ll get enough to actually replace your RV with the same make, year and model, or as near to it as possible – complete with all the accessories that ordinary auto policies usually exclude. RV policies will also pay the cost to replace the equipment that was on the original (provided you documented it when you purchased the insurance, of course).
Can you replace with a new RV?
Some policies, however, will do you one better: If your RV is totaled or stolen (and not recovered), and it’s within its first five model years, the carrier will replace your RV with a brand new RV – even if you’re not the original owner. After the first five years, you will receive your original purchase price – not a depreciated amount, but everything you paid minus your deductible – toward the purchase of a replacement RV. As we demonstrated above, the difference in settlement at claim time could well amount to as much as $30,000 after five years of owning the RV – tax free.
All things being equal, this is the kind of insurance you want to own at claim time. Yes, depreciation happens. But by owning a full replacement cost policy from a specialized RV carrier, you can remove the risk and uncertainty from the equation, and ensure that no matter what happens to your RV out on the road, your insurance policy will make you financially whole.
That's it! Those are my top 10 tips for buying an RV. Oh, and don't forget to test drive the unit. I guess that's an obvious one, right?