Knowing Your Property Insurance Policy, Part 2

What is the difference between replacement cost value and actual cost value?

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It is important to know whether your insurance policy will value your damages, to both the structure and your personal property, on a replacement cost value or an actual cost value basis. These values establish the amount you may recover after a loss.

The term “replacement cost”, or “RCV”, is defined or explained in the policy. It generally means the cost to replace the property with other property of comparable material and quality used for the same purpose. For example, the replacement cost value of a home is calculated by taking into consideration the size, type of construction and quality of construction and applying building cost data to establish what it would cost to replace the structure with like, kind and quality materials, using today’s construction methodologies.

The term “actual cost”, or “ACV”, is computed by subtracting depreciation from replacement cost. The depreciation of something is usually calculated by establishing a useful life of the item determining what percentage of that life remains. This percentage multiplied by the replacement cost equals the ACV.

As an example, if you purchased a television for $2,000 five years ago and it was destroyed in a fire, your insurance company may determine televisions have a useful life of 10 years. At the time of the fire, the same or similar television costs $2,500 brand new. The destroyed television has 50%, or 5 years, of its life remaining at the time of the fire. The ACV would be establishing by multiplying the replacement cost of $2,500 (cost of new television today) by the useful life remaining at 50%, for a total of $1,250 ACV. It is important to know that if you have an actual cash value policy, you may only be entitled to the ACV value of the television until you can prove to your insurance company it cost you more to replace the television you lost.

If you would like further information on the difference between these values, or if would like our office to review your policy to review your coverage, please contact us.

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