I mentioned this on another topic but I did not give an example. I think I was misunderstood. So here is the the full explanation with an example.
Coinsurance can be calculated on an ACV basis even if the insured has RCV coverage. If an ACV coinsurance calculation pays more to the insured than an RCV coinsurance calculation, settlement can be made using the ACV coinsurance calculation. (If the carrier agrees)
Here's how it works:
The insured has 4 very old printing presses and one brand new one.
The old ones have an RCV of $400,000.00. The new one was bought last year for $100,000. Total RCV is therefore $500,000.00.
Insurance in force is $200,000.00 with 80% coinsurance.
On an RCV basis, the coinsurance percentage compensable is 50%
(200,000 /(500,000 x .8))
The new press burns up completely. With 10% depreciation, the ACV of the new machine is $90,000.00
On an RCV basis the insured would be paid $50,000.00
But to be fair to the insured the carrier asks the adjuster to calculate coinsurance on an ACV basis. (This has happened to me three times)
The adjuster learns that the old machines are from 1962. A new comparable machine, doing the same printing, would cost $100,000.00 each. But the old machines have a much lower market value. Based on used machine market prices the ACV is $30,000.00 each.
The total ACV value of all the machines combined is therefore $210,000.00.($30,000 x 4, + 90,000)
So coinsurance percentage compensable on an ACV basis would be 100% (no penalty applied)
(Insurance required is (210,000 x .8), or $168,000.00. Since the insurance in force is $200,000, no coinsurance applies on an ACV basis)
So in conclusion, calculating coinsurance on an ACV basis will result in a larger payment to the insured, in this hypothetical example. Using this method the insured can be paid $90,000.00 instead of $50,000.00. (Note that the insured is paid ACV- you can't have it both ways...)
Many insurance companies are willing to calculate coinsurance and make settlements on an ACV basis when it benefits the insured. This is often done on the CP99 commercial form. Not all companies will do this, but some will actually tell the adjuster to do it. The policy doesn't specifically address it but it is done all the time.
(Note that this scenario works when the ACV valuation of the total property is relatively low due to higher depreciation and the ACV of the damage is relatively high. If the undamaged machines were new, and the damaged machine was old, the scenario would be reversed- an ACV coinsurance calculation would result in lower payment to the insured. In that case payment would be made on an RCV basis like normal.)