Difference Between Actual Cash Value and Replacement Cost

The insurance industry can be tough to understand, that is why you must hold an insurance license to sell it. For consumers, understanding a few key terms will allow you to pick the coverages that are right for you and your situation. This starts with identifying the difference between actual cash value (ACV) and replacement cost value (RCV). Knowing the difference between these terms, will help with claim repairs.

Actual Cash Value (ACV)

Defining “actual cash value” is not easy. Some courts have explained it as “fair market value.” However, most courts have supported the traditional definition the insurance industries have set which is: the cost to replace with new property of like kind and quality, less depreciation. The most common definition of deprecation is the loss of value from all conditions such as age, wear and tear and deterioration.

Replacement Cost Value (RCV)

The insurance industry defines “replacement cost value” as the cost to replace the damaged property with the materials of like kind and quality without subtracting depreciation. Replacement cost is defined as to repair or replace the item in today’s market conditions while make the insured whole again.

What Does it All Mean?

Many homeowners’ insurance policies may contain the following wording:

“We will pay the cost to repair or replace with similar construction and for the same use on the premises, subject to the following: until actual repair or replacement is complete, we will pay only the actual cash value at the time of the loss of the damaged property.”

Let’s say your current homeowner insurance policy is written on a replacement cost policy for example. One afternoon, you are napping in your bedroom when you are suddenly awoken by a loud thud. You walk into the hallway to examine the commotion and you see a tree has fallen over your roof causing significant damage.

You know the insurance company is responsible to pay for the damage from a covered loss to make you “whole” again. One of the factors the insurance company will look at is the age of your roof, and in your case, you think your roof is about ten years old. If you have a replacement cost policy the your insurance company will issue you the first payment for the actual cash value amount of the roof (the replacement cost minus the ten years depreciation). Once your roof is replaced by a professional contractor, your insurance company will issue a second check for the depreciation amount initially held back. Making the total of the two checks the amount of the full replacement cost value of your damaged roof (after your deductible).

What is Better, an ACV or RCV Home Policy?

Let’s discuss the difference in payouts. Let’s say your home has a replacement cost value of $255,000, but you thought a less expensive policy would be better and chose ACV at $197,000. While it may not seem like it, it’s a big difference in value, especially when it comes to the amount the insurance company is going to pay at claim time. The one thing many people don’t consider when picking coverage is, the amount of money it will take to rebuild your home does not change because of the type of policy you choose. It is still going to be $255,000 to rebuild your home and you will only get $197,000 from the insurance company. At that point, you will have to ask yourself, “Do I want to come up with $58,000 out of pocket later to save a few bucks now?” You probably don’t want to do this. If budget is your concern, you can always choose a higher deductible, pick an insurance carrier that offers discounts for multiple policies and ask if there are any other discounts you may qualify for.

Make an Educated Choice

If you’d like to learn more about replacement cost value or actual cash value, contact one of our insurance experts. Once you understand the insurance you are buying and how it protects you, it’s easier to make the right choice. The experts at R.C. Keller & Company will get you properly protected with premiums that are as affordable as possible.

Call 847-907-4520 today to learn more about our various Illinois home and auto insurance options and to receive a complete coverage review and quote.

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