Actual Cash Value vs. Replacement Cost

Actual Cash Value vs. Replacement Cost

August 01, 2018

A question we have had come up a lot lately (primarily stemming from our hail claims), is what is the difference between actual cash value settlement and replacement cost?

This is a simple answer and VERY important for all consumers to know, especially when it comes to their property, whether that be a home or a commercial building.

Actual Cash Value is a more broad term out of the two of them. ACV is generally defined as fair market value or replacement cost minus depreciation. The most commonly used definition is the replacement cost minus depreciation. This essentially means that the insurance company will calculate what it would cost to rebuild or repair the structure with like kind and quality materials then they subtract depreciation. Depreciation is usually defined as a reduction in value due to time and wear and tear. In summary, the ACV settlement on property will generally not provide you with enough funds to replace or repair the building to like kind without some sort of money above the deductible from the customer.

Replacement Cost is a much more specific and a more comprehensive coverage. RC essentially provides an insured with the funds to replace or repair a building to like kind and quality. There is no depreciation factored in. The insured is given what they need, within their policy limits, to get the building to where it was before.

Most people don’t pay close attention to these settlement options and then when a property claim arises they are shocked to know how much they will have to pay due to having an ACV settlement on their policy. In order to ensure that you are able to rebuild or replace your home or commercial building to its previous level of construction make sure that you have Replacement Cost settlement on your property policy. This can make or break your pocket book when it comes time for a claim. Review your policy and make sure your covered!