Actual Cash Value or Replacement Cost Value?
Suppose someone asked you right now whether your home, business, auto or
other property insurance covers you for actual cash value (ACV) or
replacement cost value (RCV), would you know?
Or, if you were just about to buy one or more of these insurance policies,
would you know the difference between ACV and RCV -- and, most importantly,
the difference it would make to the level of protection you were buying?
The truth is that the difference between the two could be massive if you
were making a claim. It could cost you a fortune if you made the wrong
Yet, many people don’t know of or understand the difference between actual
cash value and replacement cost value.
So, let's put that right.
First, whether we're talking about either type of coverage, the goal is to
help reimburse you towards the cost to replace lost or damaged items.
Now, read on…
What Does Actual Cash Value Mean?
In very simple terms, actual cash value refers to what an item would be
worth right now, not what it cost when you bought it.
The difference between the "then and now" value is accounted for by the age
of the item and the wear and tear it has undergone over the years.
Insurers calculate this difference by using a process called depreciation.
Basically, if you have an item whose expected useful lifespan would be 20
years (a car or a roof for example) and it was 10 years old when you made
an insurance claim, the insurer would only pay out half of its replacement
or repair cost because it was halfway through its life.
What Does Replacement Cost Value Mean?
As the name suggests, replacement cost value means that your property,
whether it's a home, a business, a boat or a car, is covered up to the full
cost of replacing or repairing it with like kind and quality.
As you can tell, this could mean a significantly higher payout if you made
a claim. In the example above, you would, in simple terms receive 100% of
the repair or replacement value.
How Do Insurers Apply ACV and RCV?
Of course, it's not quite as simple as the straightforward examples we've
just shown. Insurance is often a complex field -- which is why we have
agents to help us sort things out!
In most cases, the choice of whether a policy offers ACV or RCV coverage is
yours. You get to decide when you buy your policy (or decide to switch it),
However, some standard policies might use one or other of these options as
a default, so it's important that you check your level of coverage with
For example, a homeowners' insurance policy might provide RCV as the
default on the actual structure of your home, but ACV on the contents.
Here are some other factors you might need to take into account:
- Clearly, RCV offers more peace of mind than ACV in terms of how much it
pays out, but replacement cost value insurance also costs more -- though
this may only be around 10 to 25 percent.
- Because it uses depreciation calculation, ACV coverage will decrease on
items as they age.
- In both cases, you may be expected to pay a deductible (the amount you
shell out from your own cash before the policy kicks in) before any claim
- RCV may not be available on some older properties. Insurers may insist on
actual cost value instead.
- Standard RCV policies generally do not cover the full replacement cost of
high-value items such as antiques and collections. These are usually capped
at $2,500 or less, though endorsements called floaters or riders, or even
separate policies, may be available for these.
- Sometimes, on a RCV policy, an insurer will initially pay only the
depreciated ACV amount until the insured presents evidence that repairs or
replacement have been completed. Then it will pay the balance.
More Questions Answered
What is the difference between market value versus cash value?
This has been an issue of considerable legal debate. Again, in simple
terms, market value is what someone is prepared to pay for and the seller
is prepared to sell at for an item.
This may not be the same as the ACV, which is based on an insurer's idea of
For example, you could have a building in good condition that the insurance
company may say it’s Physical Depreciation is 25% reduction from the
replacement cost. But lets say it is located in an inner city neighborhood
that has turned bad and no one wants to purchase properties there. So maybe
the Market value is only 50% of the replacement cost.
What If I Want to Move to Another Location?
If you have replacement value coverage for your home or investment property
and it has been destroyed, you're not obliged to replace it. Most insurance
companies will pay you the Actual Cash Value for the building and you can
walk away. Some insurance companies will even allow you to rebuild at a new
location but they won’t pay more than what they would have paid to rebuild
the damaged building at the same location.
What if the building code has changed?
Unless they specifically state otherwise, most ACV and RCV policies do not
cover the cost of having to implement enhanced building code requirements
when you are replacing or repairing your home.
Insurers are required to state this limitation clearly in the policy
If you want to check the scope of your insurance coverage with regard to
ACV or RCV, it's a good idea to speak with your agent.
The same advice applies if you are seeking a new policy, want to switch
between one and the other, or if you have questions about the advantages of
In PA, OH or NJ, please feel free to discuss this with Definitive Insurance. Don’t worry if this debate seems confusing. Just call us at 1-717-537-1104. We'll
make it easy!