Most people don't think about how their insurance company determines the value of their property until they have a claim.
That's when two terms suddenly become very important:
Replacement Cost Value (RCV) and Actual Cash Value (ACV).
They may sound like insurance jargon, but the difference between them could mean thousands of dollars out of your pocket after a loss.
Here’s what you need to know.
What Is Replacement Cost Value?
Replacement Cost Value, commonly called RCV, is generally based on what it costs today to repair or replace damaged property with materials or items of like kind and quality, subject to the terms and limits of your policy.
The key difference?
Depreciation generally isn't used to permanently reduce the covered replacement cost simply because the damaged property is older.
Let's use a roof as an example.
Imagine your roof is 10 years old when a covered storm causes significant damage. Replacing it costs $20,000.
If your roof is insured on a replacement cost basis, your policy may ultimately provide coverage based on that $20,000 replacement cost, minus your deductible and subject to your policy terms.
There can be another step involved, though, which we'll explain below.
What Is Actual Cash Value?
Actual Cash Value, or ACV, generally takes depreciation into consideration.
A simple way to think about it is:
Replacement Cost – Depreciation = Actual Cash Value
Let's go back to our $20,000 roof.
Suppose the insurance company determines that $8,000 of depreciation applies because of the roof's age and condition.
The numbers could look something like this:
Replacement cost: $20,000
Less depreciation: $8,000
Actual cash value: $12,000
Then your deductible may also apply.
That's a very different outcome from simply receiving the full amount needed to replace the roof.
What Is Depreciation?
Depreciation represents the reduction in value of property over time because of factors such as age, condition, wear and tear, and expected useful life.
And it doesn't only apply to roofs.
Think about a television you purchased five years ago for $1,500.
If that television is destroyed in a covered loss, an ACV settlement may consider what that five-year-old television was worth immediately before the loss.
Replacement cost coverage, on the other hand, may consider the cost of purchasing a comparable new television today, subject to the policy's terms and limits.
That's why knowing how your property is insured matters.
What Is Recoverable Depreciation?
Here's another term homeowners often don't encounter until after a claim.
Recoverable depreciation can come into play when property is insured on a replacement cost basis.
An insurance company may initially pay the Actual Cash Value of the damaged property. After you actually repair or replace the property and provide the required documentation, the carrier may release additional funds representing recoverable depreciation.
For example:
Replacement cost: $20,000
Depreciation: $8,000
Initial ACV amount: $12,000
After the covered repairs are completed, some or all of that $8,000 in depreciation may be recoverable, subject to the policy terms.
Your deductible would still apply.
This is one reason a replacement cost claim doesn't necessarily mean the insurance company hands you the entire replacement cost immediately.
Your Roof and Personal Property May Be Treated Differently
This is important.
Just because part of your homeowners policy provides replacement cost coverage doesn't necessarily mean everything on the policy is settled the same way.
Depending on the insurance carrier and policy, your:
- Dwelling
- Roof
- Personal belongings
- Other structures
may have different loss-settlement provisions.
Some policies or endorsements may specifically settle older roofs on an Actual Cash Value basis.
That's something worth knowing before the storm happens, not afterward.
A Cheaper Policy Isn't Always the Better Policy
When comparing homeowners insurance quotes, it's easy to look straight at the premium.
We understand. Price matters.
But imagine one policy costs a few hundred dollars less per year while settling a major portion of a future claim on an Actual Cash Value basis rather than Replacement Cost.
That difference could potentially dwarf the premium savings.
Insurance shouldn't only be about asking:
“Which policy is cheaper?”
You should also be asking:
“What am I actually getting for that price?”
How Do I Know Which One I Have?
Look at your homeowners insurance policy and declarations, but don't be surprised if the answer isn't immediately obvious.
Terms such as these may appear:
Replacement Cost
Actual Cash Value
Loss Settlement
Replacement Cost on Contents
Roof Surfacing
Scheduled Roof Payment
The exact wording varies by carrier and policy.
If you aren't sure what yours means, ask your insurance agent to explain it.
A good question is:
“If I had a major claim tomorrow, which parts of my home and belongings would be settled at replacement cost, and which would be settled at actual cash value?”
That's a much better question than simply asking whether you have “full coverage.”
Don't Wait Until You Have a Claim to Find Out
The best time to understand your insurance policy is before you need to use it.
At The Talley Insurance Group, we believe insurance should be explained in plain English. As an independent insurance agency, we can help you review your current coverage, understand what you're actually paying for, and compare options from multiple insurance carriers.
If you haven't reviewed your homeowners coverage recently, this is a great reason to do it.
Contact The Talley Insurance Group today for a policy review or homeowners insurance quote.
Because saving money on insurance is great.
Knowing what you're actually covered for is even better.
Coverage and claim settlements vary by insurance carrier, policy form, endorsements, state, property characteristics, deductibles, limits, and individual circumstances. This article is for general informational purposes only and does not modify, guarantee, or interpret coverage under any specific insurance policy. Always refer to your policy and carrier for specific coverage information.
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