Actual Cash Value vs Replacement Cost
What is the difference between Actual Cash Value and Replacement Cost Value in an insurance Policy?
When comparing insurance policies, it is important to consider more than just the price of the coverage. While policies can vary in price, they can also provide very different coverage, so it is important to understand how the coverage would apply to a loss if something unfortunate happens.
One important difference found in many property policies is that it may provide coverage based on the Actual Cash Value (ACV) of the loss, or it may provide Replacement Cost Value (RCV). RCV will often be referred to as simply Replacement Cost (RC).
Actual Cash Value
Actual Cash Value is the amount your property is worth today, and accounts for the age and depreciation of the property. An easy way to understand this is to look at the value of the car that you are driving. Most auto policies will pay for a total loss to your car on an ACV basis. If your car is 5 years old, it is worth less than when it was new, and the mileage and condition of the car will affect the value, along with the age of the car. That is the ACV value.
Another way to look at it is that the ACV value is the cost new minus depreciation. Depreciation is the normal wear and tear of the property over time that reduces the value. So, if the shingles on the roof of your home were covered for ACV, you would be paid less than the full cost to replace them. If a loss happened when they were 15 years old, and the shingles were expected to last 30 years, you would be paid about half the cost to replace them with an ACV policy.
While this is expected for an auto policy, many property policies like your homeowners or renters policy will have an option for coverage at either ACV or replacement cost. If you have this choice, in most cases you will find it worthwhile to pay an additional premium to get the Replacement Cost coverage.
Replacement Cost Value
Replacement Cost is the amount it would take to replace an item with new, or repair it to like new condition. The age of the item does not matter. So, if you had a loss to a 10-year-old television, RCV would pay the cost to replace it with a new one of similar size and quality. If your roof shingles were damaged in a storm, RCV coverage would pay to replace the existing shingles with new ones.
With RC coverage you do not need to be concerned with the age or condition of the property, the policy will pay to replace it with new.
With homeowners insurance, you will find that most (but not all) policies will pay RCV for damage to the building, but there may be exceptions, with damage to roofing shingles as an example. The roof may be covered for ACV or RCV, depending on your policy. The coverage for the contents of the home (personal property) can either be covered for ACV or RC, so be sure to choose the replacement cost option if that is what you want.
Market Value
With homeowners insurance, we should also mention Market Value. This is the amount your house would sell for today. Depending on many factors, with location being most important, the market value of the home can be different than the cost to rebuild. So, this value of the home does not really affect the amount that it should be insured for. The home should be insured for the amount it would cost to re-build it today.
Getting the Right Policy for You
With property insurance like a homeowners or renters policy, you will want to be sure to get replacement cost coverage if it is available. In most cases you will have this option, but sometimes ACV may be your only choice.
Also, keep in mind that insurance is designed to "make you whole", or put you in the same place you were prior to a catastrophic loss. You should not expect to profit from a loss or end up better off than you were before the loss happened. Hopefully, you never experience a severe loss to your property, but if you do, you will be glad that you took the time to understand the insurance coverage you chose to protect yourself.
If you have any questions about your insurance coverage, be sure to contact us at Rongstad Insurance, we will be happy to answer your questions.