What is the Difference Between “Actual Cash Value” and “Replacement Cost”?

Wednesday, July 18, 2018

Insurance has many terms that can often be difficult to fully understand. Knowing what these terms mean in relation to managing your home and auto insurance can be crucial. Let’s look at two terms that are very different and are often confused: Actual Cash Value and Replacement Cost.


Actual Cash Value (ACV) means your insurance company agrees to pay you the depreciated value at the time of your loss.  These payments include a deduction for depreciation. While a cash value settlement may sound appealing, it does not let you replace what you lost. Instead it compensates you for the value of the item almost as if it were being sold at a yard sale.

Choosing actual cash value on your policy may leave you wanting, since you cannot go to a store and buy an exact new item.  When you have this selection on your policy, it is difficult to rebuild your personal contents, not to mention rebuilding your home due to the depreciated value. You will be at a loss.

Replacement cost policies are a better option. Here’s why.

Replacement Cost provides you with a payment equal to what is required to replace lost items in the loss settlement of your claim.

Replacement cost is much better than ACV because it allows you to be in the same position you were in before the loss. Your claim will provide the necessary money to replace your items.

You must replace the item(s) before the replacement cost is paid by your insurance company. Many people do not understand this. You don’t simply get a check and that’s that.

Your insurance adjuster will review your list of losses, decide what will be replace or repaired, and assign or approve the values. In the case of an ACV provision on your policy, the depreciated value of the items comes into play.

Once the insurance company has had a chance to review your list, you will have a chance to look at their offer before receiving a payment. If your basis of loss settlement was actual cash value, then they may ask you to sign off on the amount, saying it is a final payment, before giving you a check. The process is different for replacement cost.

When you have a claim and the loss settlement is on a replacement cost basis, expect that you will have two checks at least before getting fully compensated.

Once you prove that you have replaced the items, will you receive final payments. It is your responsibility to replace the items before you can get paid for the full replacement cost.

Keep an open line of communication with your insurance representative on your claim to help you understand exactly what to expect and when you will receive payment for your actual loss.


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