Replacement Cost vs Actual Cash Value

Replacement Cost and Actual Cash Value are the two methods insurance companies use to calculate how much they will pay for a loss. How much money you receive from a claim depends on your individual house insurance policy. Which method is used in calculating your claim check? How will your insurance company come up with a figure to pay you for the claim you just sent to them?

What is Replacement Cost?

Replacement Cost Value or RCV is used for the policies which states RCV coverage is in your policy. For example, if your refrigerator was destroyed by a lightning strike, a replacement cost policy will reimburse you for the full cost of replacing the refrigerator with the same make, model, and quality even though it was used for 8 years. Your insurance company will not take into account wear and tear, nor the age of the item. If the refrigerator cost $1,000 eight years ago and today’s price for the same make and model cost $1,250, the insurance company will write a claim check for $1,250 minus the deductible on your policy.

Sometimes, many personal items are destroyed due to a covered peril. Most insurance policies would pay Actual Cash Value at the time of loss. Afterwards, they would pay the remainder of the replacement cost when the policyholder actually buys and replaces the destroyed items. The insurance policy usually gives the policyholder a maximum of 180 days to obtain the new item in order to receive the extra replacement check.

What is Actual Cash Value?

Actual Cash Value or ACV is also known as market value or the real worth of an item. That is considering its age and wear and tear on a particular item. Actual Cash Value is equal to the replacement cost minus depreciation (ACV = RCV – depreciation). It represents the dollar amount you could expect to receive for the item if it were sold. The insurance adjuster determines the depreciation based on a combination of different things. A formula is used to take into account the category and age of the property. The adjuster will observe and photograph the damaged item. Take the refrigerator for example. The insurance company would compare the same make and model of that refrigerator. They may determine the maximum life expectancy to be 16 years. If the customer used the refrigerator for 8 of the 16 year life expectancy, the adjuster would figure that you used half of its value. Therefore, the $1,250 cost of the same make and model refrigerator would come out to about $625 minus the deductible stated on your policy. If the adjuster sees that there is more than normal wear and tear, the assessment may be less. An example would be if you stored your second refrigerator in your garage, and the exterior became very rusty, which is obviously well beyond what caused the destruction of the refrigerator.

Many insurance companies may not offer replacement cost if you own an older home, have a secondary home policy, or have a tenant house policy.