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Actual Cash Value vs. Replacement Cost in Property Insurance claims

Actual Cash Value vs. Replacement Cost in Property Insurance claims

Many terms that are used in insurance policies, are sure to confuse you and leave you feeling frustrated.

This week’s blog will explain two terms that are often misunderstood: Actual Cash Value vs. Replacement Cost.

Most standard homeowners insurance policies cover the replacement cost (RC) of your home’s physical structure and the actual cash value (ACV) of your personal property. An insurance policy with coverage based on actual cash value is the least expensive to purchase.

Where it all starts: the  insurance claim

When an insurance claim is filed, there is usually an estimate done for the damages. There are two ways that the insurance company may come up with the amount that they are willing to pay for your loss: You can be paid the replacement cost “RC” or the actual cash value “ACV”.  Following are explanations for both terms, what you need to watch out for and what you need to know specifically in order to maximize your property insurance claim.

Replacement cost – RC

Replacement cost is what it would cost to replace a dwelling or personal damaged property with the same or similar item, with the limit of what is shown on your policy. The Replacement cost (RC) is usually based off what was initially paid for the item. Sometimes the item might no longer be available, in that case, you will be paid the initial price.

Actual Cash Value – ACV

Actual cash value (ACV), which is the preferred standard of reimbursement by insurance companies, pertains to the cost of replacing damaged property with similar new property minus depreciation. It is also known as the “market value”.

For instance, a 15-year-old roof would not be replaced at full value, and that’s due 15 years of depreciation.

Insurers calculate depreciation differently, based on the expected lifetime of an item, subtracted by a percentage of value for each year since its purchase. If – for example, you own a dishwasher, that cost you 500$ and is expected to last for 10 years, the depreciation calculation will reduce 50$ per year from the time the dishwasher was purchased to the time you submit your insurance claim.

So What’s the difference?

The difference between “RC” & “ACV” is simple: Both are calculated based on how much the item would cost today, except one (Actual Cash Value) deducts depreciation. However, both RC and ACV are based on the current cost to replace the damaged property with new property.

An ACV based insurance policy will be cheaper to purchase than an RC based insurance policy, since depreciation is considered and the claim payments are generally lower.


Think you need some help?

If you have think you have a claim contact Property Damage Consultants and we will be glad to help you navigate through terms like these and others.

Contact us today!!

With 29 years of Adjusting experience, Craig Drillich established Property Damage Consultants in 2002. After working on behalf of the insurance companies for twelve years and tired of seeing the injustice being done to the property owners, Craig Drillich, President of the Board of Directors of the Florida Association of Public Insurance Adjusters (FAPIA), became a consumer advocate as an all lines licensed Public Adjuster and Appraiser.

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