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Actual Cash Value vs. Replacement Cost

Insurance can be tough to understand, that’s why you must hold a license to sell it. But for consumers, understanding a few key terms will allow you to pick the coverages that are right for you and your situation. That starts with identifying the difference between actual cash value (ACV) and replacement cost value (RCV). The reason you must know these terms and their differences is because at a claim time it’s the difference between a little money and a lot of money for repairs.  

Actual Cash Value or ACV

It’s not easy to define “actual cash value”. Some courts have explained it as “fair market value.” However, most of the time the courts have supported the traditional definition the insurance industries have set which is: the cost to replace with new property of like kind and quality, less depreciation. The common definition of depreciation is the loss of value from all conditions such as age, wear and tear, and deterioration.


Replacement Cost Value or RCV

Insurance companies define “replacement cost value” as the cost to replace the damaged property with the materials of like kind and quality without subtracting depreciation. Replacement cost is defined as to repair or replace the item in today’s market conditions while making the insured whole again.  

What Does it All Mean?

Many homeowner’s insurance policies may contain the following wording. 

“We will pay the cost to repair or replace with similar construction and for the same use on the premises, subject to the following: until actual repair or replacement is complete, we will pay only the actual cash value at the time of the loss of the damaged property.”

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For example, let’s say your current homeowner’s insurance is written on a replacement cost policy. One afternoon you are napping in your bedroom when you suddenly hear a loud thud. You walk outside to examine the commotion and see a tree has fallen over on your roof causing significant damage. 

You know the insurance company is responsible to pay for the damage from a covered loss to make you “whole” again. One of the factors the company will look at is the age of your roof, in your case you think your roof is about ten years old. If you have a replacement cost policy the insurance company will issue your first payment for the actual cash value amount of the roof (the replacement cost minus the ten years depreciation). Once the roof is replaced by a professional contractor, your insurance company will issue you a second check for the depreciation amount initially held back. Making the total of the two checks the amount of the full replacement cost value of your damaged roof (after the deductible). 

Chalkboard with the words "ACV vs. RC?"

Which is Better, an ACV or RCV Homeowners Policy? 

First, let’s discuss the difference in payouts. Let’s say your home has a replacement cost value of $255,000, but you thought a less expensive policy would be better and chose ACV at $197,000. While it may not seem like it, it’s a big difference in value, especially when it comes to the amount the insurance company is going to pay at claim time. The thing many people don’t consider when picking coverage is, the amount of money it will take to rebuild your home doesn’t change because of the type of policy you picked. It is still going to be $255,000 to rebuild your home, and you are only getting $197,000 from the insurance company. At that point, you have to ask yourself, “Do I want to come up with $58,000 out of pocket later to save a few bucks now? Probably not. If budget is a concern, you can always choose a higher deductible, pick a carrier that offers discounts for multiple policies or ask if there are any other discounts you may qualify for. 

Make an Educated Choice

To learn more about replacement cost value or actual cash value, contact one of our insurance experts. Once you understand the insurance you’re buying and how it protects you, it’s easier to make the right choice. Together, we’ll get you properly protected with premiums that are as affordable as possible.

Call us today to learn more about our various Connecticut home and auto insurance options and to receive a complete coverage review and quote.

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