Ask NJM

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Depreciation accounts for wear and tear, plus advancements in technology that make your property out of date at the time of loss.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.

Learn more about NJM Insurance, or explore other insurance topics in Ask NJM.

*Excessive wear and tear or prior damage may result in greater depreciation at the time of loss.

The content on this page is intended for informational purposes only. It is not an insurance policy, and does not, in any way, replace or modify the definitions and information contained in individual insurance policies. Terms and coverage availability may vary by state, and exclusions and deductibles may apply. Discounts also vary by state and may not be applied to all policy coverages. Coverage for an accident or loss is subject to the terms and conditions of the insurance policy applicable to a particular claim.