Difference between “Actual Cash Value” and “Replacement Cost” – guest blogger Tony Lucacio

Most policies covering property value the damaged property at either its Replacement Cost or its Actual Cash Value. But most people don’t read their policy to understand what these two property valuations mean to them, or the impact it can have on their settlement.

I will attempt to simplifiy these valuation for you over the next few paragraphs. Let’s start with a very basic definition of each. “Actual Cash Value” is the cost new of the item less the item’s depreciation. “Replacement Cost” is the cost to replace that damaged item at todays cost with an item of like, kind, and quality.

So what does all this mean? Let’s tackle Actual Cash Value (ACV) first. Let’s say that a building policy has a valuation using ACV. That property sustains damage by fire to a roof that is 10 years old. Let’s further agree that the useful life of that type of roof is 30 years. At the time of a loss the cost to replace that roof was $50,000. Let’s look at how this claim would be settled, remembering that ACV is the item cost less depreciation. The depreciation on this item is 10 divided by 30, or 1/3. A 30 year life that has already used 10 years. Therefore payment for this $50,000 roof would be $33,333 ($50,000 replacement less 1/3 depreciation. The rationale behind this settlment is that the insured party has enjoyed 1/3 of the benefit of this roof prior to the loss.

That same loss that is settled on a replacement cost basis would be valued at $50,000. The cost to replace that roof at the time of the loss.

So, why would anyone want ACV? Well, usually you would not want ACV. Price is always a consideration and on some older properties it may be difficult to get an insurance carrier to agree to a Replacement Cost valuation. This also gives the insured person a stake in keeping the property safe from claims because they would share some in any loss.

Check your policy, and if possible ask about getting Replacement Cost valuation. Of course if you have any questions we are here to help. Visit our website or call (877)608-3708.

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