Feels like this answer is going to be obvious but I keep going in circles and still don't get it.

I understand the definition of Actual Cash Value (RCV - depreciation) and that depreciation is a difficult number to calculate, but how is the depreciation actually determined and who determines it? How can a lender make certain it's a reasonably accurate number?

Follow up question: if the RCV is used to calculate the required flood insurance for a commercial building, it appears that would be too much coverage since NFIP policies only pay the ACV amount. Is that correct?

All good questions. Your lender is probably not the one that can make this determination of value. There are companies like Marshall-Swift that specialize in ACV appraisals. The insurance underwriter also has to make this determination. You can use the hazard insurance (which is more RCV but may not give full dollar to some things), the cost approach from the appraisal as well. This regulation puts lenders in a tough spot - as you know.


You are correct. Non-dwellings, and some dwellings, should never be covered for RCV. It will never pay. There are several pending lawsuits on this issue. Read the short article entitled "Flood Insurance Insurable Value" at our website for a better understanding - but not an answer to all of your questions. I've been studying this topic for years, can easily talk on it for several hours and still wouldn't be able to give you a complete answer.
http://www.bankerscompliance.com/compliance-resources/free-downloads.htm

You're awesome as always David - thank you very much!

Glad I could help!

"You can use the hazard insurance (which is more RCV but may not give full dollar to some things)..."

I want to ask a clarification question from David's response that I quoted above. Many of our flood insurance policies list their own RCV that the insurance underwriter calculated. Would that really be a sufficient method to show required coverage on non-owner occupied properties where we can only use ACV?

Otherwise, why even list an RCV, if they already know they would never pay out that amount, unless zero depreciation occurs?

Sorry for the delay in my response. I've been on vacation the last 2 weeks and just saw your post.

Many of our flood insurance policies list their own RCV that the insurance underwriter calculated. Would that really be a sufficient method to show required coverage on non-owner occupied properties where we can only use ACV?
RCV is of no use on a building that is limited to ACV. These are 2 different things.

You're right that unless there is zero depreciation (which would only be the first day after a building has finished construction), RCV makes no sense on a building that doesn't qualify for RCV coverage.