Understanding Actual Cash Value and Replacement Cost
Your policy may cover property on an Actual Cash Value or Replacement Cost basis. This basis determines how your insurance company will reimburse you for damaged or destroyed property after a covered loss.
Actual Cash Value is the cost to repair or replace property at the time of loss with like kind and quality, less depreciation.
An insurance company estimates Actual Cash Value based on the cost to repair or replace property just before it was damaged, minus depreciation.
Depreciation means the decrease in value as property deteriorates and becomes obsolete over time.
Depreciation accounts for wear and tear, plus advancements in technology that make your property out of date at the time of loss.
Depreciation could affect the amount your insurance company would pay for damage to any of the following types of property:
- Vehicles
- Building materials such as shingles, siding, drywall, and carpeting
- Furniture
- Appliances
Calculating depreciation
This is just one example of how an insurance company might calculate depreciation.
It would cost $1,000 to replace your sofa with a sofa of like kind and quality.
| Replacement Cost: | $1,000 |
| ÷ Estimated Life Expectancy |
÷10 years |
| = Annual Depreciation | =-$100 per year |
Filing a claim
Here’s an example of how a claim might be paid for property covered on an Actual Cash Value basis:
Your sofa is two years old and damaged beyond repair in a covered loss.
| Replacement Cost: | $1,000 |
| - Depreciation* Your sofa’s life expectancy is 10 years. It’s 2 years old. |
-$200 |
| - Deductible This is what you pay out of pocket. |
-$500 |
| Your insurer will issue a claims check for: | =$300 |
Replacement Cost is the cost to repair or replace property at the time of loss with like kind and quality.
Using a Replacement Cost basis, your insurance company would reimburse you for the cost to repair or replace your property, without regard for depreciation. You would receive the reimbursement after you repaired or replaced the damaged property.
Filing a claim
Here’s an example of how a claim might be paid for property covered on a Replacement Cost basis:
Your sofa is two years old and damaged beyond repair in a covered loss. You replace it with a sofa of like kind and quality for a cost of $1,000.
| Replacement Cost: | $1,000 |
| - Deductible This is what you pay out of pocket. |
-$500 |
| Your insurer will issue a claims check for: | =$500 |
Insuring expensive items to value
Even if your policy covers property on a Replacement Cost basis, it will still have limits on high-value items like jewelry, silverware, and art. To insure these kinds of items for the full cost to repair or replace them, consider obtaining a Scheduled Personal Property endorsement. The endorsement values your chosen items at replacement cost even if your policy otherwise values your property at actual cash value.