Actual Cash Value vs. Replacement Cost in Homeowners Insurance Policies

July 24, 2016

Homeowners insurance policies offer actual cash value or replacement cost coverage to replace your damaged, stolen, or destroyed personal property.


Before you understand how this works, it’s important to understand the terms.


Replacement Cost (or RCV) is what you would pay for an item at today’s cost or value to repair or replace an item back to pre-loss condition.


Actual Cash Value (or ACV) is what you would pay for a similar item at today’s cost, minus depreciation. (ACV is RCV minus depreciation.)


Depreciation is a decrease in value due to wear and tear or age and the useful life of that item(s).


Many property owners believe that because they have purchased a Replacement Cost Coverage policy the insurance company will pay them up front for the cost to repair or replace their property to the way it was before that loss occurred, but unfortunately this assumption is inaccurate.


Here’s a claim scenario:

Your home and some furnishings were damaged during a recent fire.You made a claim to your insurance company and have met your deductible. Now you are looking at replacing the damaged furnishings.

Last year, you bought a sofa for your living room for $2,000. The amount of money you will receive to replace your sofa depends on the type of coverage you have.


If you have actual cash value coverage, the company might pay you $1,500 because that is the actual cash value of the sofa today (replacement cost minus depreciation).


If you have replacement cost coverage, the company will pay $2,100 because that is what it would cost to buy a similar sofa today.


It is worth noting that even if you have replacement cost coverage, most insurance companies will give you the actual cash value of an item and require you to submit a receipt for the new item before paying you the remainder.


Many homeowners experience the frustration of ACV vs. RCV when involved in a claim.   It’s important to understand how your policy works before you file a claim so you know what to expect.  Consult with your agent upon purchase of your policy, and when you need to file a claim, if you feel unsure of the process, hire a reputable public adjuster like us who will work to maximize your recovery or find a public advocate to advise you.



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