Replacement Cost vs Actual Cash Value

When it comes to insuring your own or your company’s property, knowing how your insurance policy is valuing the property is perhaps the most overlooked yet most important aspects of the policy.  Most people look only at the limit of their insurance policy and assume that is the amount they will be paid in event of a claim.  However, the limit is the maximum amount you could potentially be paid.  The way your property is valued makes a HUGE difference.  VALUATION DIRECTLY AFFECTS REIMBURSEMENT.

Replacement Cost

As the name suggests, a “replacement cost” valuation will provide you with the necessary reimbursement payment to replace your property.  If your 5 year old mini excavator is destroyed by fire, the insurance carrier will cut you a check for the full price of the purchased replacement.  If your shop gets levelled during a windstorm, the insurance carrier will cover the cost to replace the building with materials of the same or comparable quality.  Replacement Cost does not factor in the depreciation of your covered property into the reimbursement payment.

It is important to note that replacement cost is much different than the market value of a piece of property.  In the case of new residential construction, the hard costs of constructing a 5-home subdivision are significantly lower than the market value of the completed homes (hopefully).  But if the developer were to purchase a Builder’s Risk insurance policy using market value, he or she would be drastically overpaying for insurance and would receive no extra compensation or coverage in the event of a loss.

Typically the way the insurance carrier handles claim payments with a Replacement Cost valuation is once the loss is reported, they will send a check for the actual cash value of the insured property.  Once you have purchased the new piece of property, the carrier will require a copy of the receipt and then they will send the difference.  With larger property losses like that of a home or office, the insurance carrier will generally provide multiple payments throughout the reconstruction process.


Actual Cash Value

Actual Cash Value (ACV) is the cost to replace the property minus depreciation.  The way the insurance carriers calculate depreciation is complicated.  For pieces of property such as contractor’s equipment, a good indicator of the actual cash value would be the current resale price of the same piece of equipment on the market.  For property such as office buildings or homes, your property tax bill will provide some indication of the ACV under the “Improvements” section of the bill.  However, if the loss is not a total loss, meaning the whole structure is not destroyed, specific depreciation tables & rates apply.  A roof, for example, has a certain lifespan and if 50% of your 10 year old roof is damaged, the payout from the insurance carrier will be rather minimal compared to the actual cost the replace the roof.



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We love to talk insurance.  If you have any questions about the difference between Replacement Cost or Actual Cash Value, or any other insurance question, fill out the contact form below and we’ll get right back to you.

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