What’s the difference between replacement cost and actual cash value?
People often see these terms on their insurance policies but are not quite sure what they mean. The difference between these terms is significant and very important in the event of a claim settlement.
When you buy an insurance policy, you may be given the choice of insuring your property at actual cash value (ACV) or replacement cost. These are two different calculation methods used to determine how much you would receive from your policy to cover an item if it is lost or damaged. Most often, we will recommend replacement cost coverage if the coverage is available for the insured item.
Let’s look at an example: your ten-year-old TV gets stolen.
Replacement Cost means: Repairs or replacement are made with material of like kind and quality without cost to the insured for depreciation or betterment.
If you have a Replacement Cost policy, your claim will be based on the cost of buying the same TV brand, of similar kind or quality, new; there is no deduction for depreciation.
Actual Cash Value (ACV)
Actual Cash Value means: The net market value of property, taking into account replacement cost, depreciation and obsolescence. The amount of depreciation depends on the condition of the property immediately before the damage occurred, the resale value and normal life expectancy.
If you have an Actual Cash Value policy, payment of your claim will be based on the cost of buying another ten-year-old TV in similar condition to yours at the time of loss; deprecation is factored into your payment.
When calculating items at actual cash value, the insurance company can charge a lower premium. This is the same idea as increasing your deductible to reduce your insurance costs, except that in this case, your “deductible” is the difference between the depreciated value and the cost of replacing the item.
Remember that Replacement Cost is different from the market value of your home. If you were to lose your home in a fire, a claim based on Replacement Cost would cover the actual cost of the materials and labour needed to rebuild your home. Your lot is not covered, just the structures themselves.
Give us a call anytime for more information. We would be happy to discuss the difference between replacement cost and actual cash value with you and to review your current insurance policy.
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