Replacement Cost Value vs Actual Cash Value

Replacement cost value vs actual cash value

Terms like Actual Cash Value and Replacement Cost Value are seldom used outside of the property insurance industry. However, they determine how much an insurance company will pay you for your property insurance claim. After your insurance company determines that an insurance policy provides coverage for a loss, the insurer has various ways to calculate the value it will pay for lost or damaged property. There are two main methods by which the insurance company calculates the value of a loss: Actual Cash Value and Replacement Cost Value.

Actual Cash Value

Actual Cash Value (“ACV”) represents the actual dollar value of the damaged item in its depreciated, but not damaged, condition. In other words, it is the cost to replace an item, less depreciation. For example, let’s say a covered cause of loss destroyed your four-year-old dining table. Since furniture prices are constantly dropping, the dining table you paid $2,000.00 for four years ago may now have a present “actual cash value” of only $500.00, which represents what you could sell a four-year-old dining table for today. For this reason, it is important to keep all documents and receipts pertaining to the replacement of items and completion of repairs. Replacement Cost Value (“RCV”), on the other hand, represents the cost to rebuild or replace the damaged item with a new one.

Replacement Cost Value

Replacement Cost Value is the amount needed to replace or repair the damaged property with materials of similar kind and quality, without deducting for depreciation. Depreciation is a decrease in the value of a structure or personal property due to age, wear and tear or other factors. For example, let’s say that the cost today to replace your dining table with a brand new one is $800.00. That would represent the Replacement Cost Value of the dining table. Replacement cost insurance is designed to cover the difference between what property is worth and what it would cost to rebuild or repair that property. In short, Actual Cash Value = Replacement Cost – Depreciation.

Jesmany Jomarrón, Esq., Partner at Farrell Patel Jomarrón & Lopez writes: 

“It’s important for policyholders to understand that while purchasing an ACV policy may decrease annual insurance premiums, an RCV policy provides greater coverage over an ACV policy. Replacement cost coverage will pay out benefits equivalent to the cost of either repairing the property to its original condition or replacing it entirely with property of similar quality (like and kind). If your property insurance coverage is based on “actual cash value,” then you will be paid benefits in accordance with the depreciated value of the property at the time of the loss itself.  Put simply, you will receive the replacement costs minus the depreciation. Actual cash value coverage is rather limited compared to replacement cost coverage, as there is very likely to be significant depreciation in more severe property loss scenarios.
It is important to note that the replacement or repair of the damaged property must actually occur, otherwise the insurer has no obligation to provide the additional replacement cost reimbursement under the policy. However, as a policyholder, you have the right to question the insurance company’s estimate of the damages to your home and to determine whether payment based on the insurance company’s estimate would be sufficient compensate you for your loss.”

If you have questions about how an insurance company has determined the value of your claim, contact Farrell Patel Jomarron & Lopez! We provide representation to clients facing a wide range of insurance claim issues. We understand the problems and frustrations that a denied or undervalued insurance claim can cause, and we can advocate on your behalf with the insurance company in order to get the funds to which you are entitled.