Replacement Cost vs. Actual Cash Value

October 2, 2018

Actual Cash Value (ACV) and Replacement Cost Defined

Actual cash value, also called “fair market value”, is when an insurance company agrees to pay you the value of the item at the time of loss minus depreciation.

Replacement cost is when an insurance company agrees to pay for the item at today’s cost. This applied unless the limit of insurance or the cost spent to repair replace the damaged property is less.

When expecting full compensation for the replacement of personal property insured in your home, you should expect to provide your insurance company with a list of the following:

  • Items and descriptions
  • Makes and models if applicable
  • The price you paid to purchase the item
  • The replacement value today
  • Any photos showing the condition of them item if applicable or available
  • The original receipt

Because of this, it is in your best interest to make an inventory of your home and personal belongings and keep it updated regularly. This can help expedite the claim resolution process and help put your life back together faster.

Actual Cash Value vs. Replacement Cost

The difference between actual cash value and replacement cost is a deduction for depreciation.  Depreciation is a decrease in value due to wear and tear or age. Both of them are based on the value of the item today to replace the damaged property with new property.


Claims Scenario Examples


Example 1: 

A recent California wildfire caused damage to your home and some of your furniture including a $2,000 couch. After making a claim to your insurance company you are looking to replace the damaged furniture. The amount of money you will receive to replace the couch depends on what type of coverage you have.

Actual cash value: With actual cash value coverage, you will receive a payment of the value of the couch today minus depreciation. Your insurance company will give you $1,500 for the actual cash value of the couch today.

Replacement cost: With replacement cost coverage, you will receive a payment for $1,500 at the time of the claim. When you submit your receipt for the couch, your insurance company will send you $600, the difference between the actual cash value of the couch today ($1,500) and the amount you paid to replace the couch ($2,100).


Example 2: 

Your $200,000 home burns down from an electrical fire caused by your in-home washer and dryer. The amount of money you will receive to replace your home depends on what type of coverage you have.

Actual cash value: With actual cash value coverage, you will receive a payment of the value of your home today minus depreciation. Your insurance company will give you $170,000 (subtracting $30,000 of depreciation) for the actual cash value of the home today.

Let’s say you you owed a $180,000 mortgage on the home. If your actual cash value was $170,000, you would be responsible to pay the $10,000 difference on your own. This is why mortgage lenders typically require replacement cost coverage on mortgaged homes.

Replacement cost: With replacement cost coverage, you would receive the entire $200,000 to replace your burned down home.

Keep in mind that replacement cost policies usually have a co-insurance clause. This might require you to insure the property for at least 80% of its replacement cost. This means you would be required to carry at least $160,000 in coverage for your $200,000 home. If you have your home insured for less, you may incur a financial penalty.

Contact Us!

Do not hesitate to contact us with any questions you may have about your policy or coverage options. Just call us at 415-386-2283 to speak to an agent or send a message at [email protected]!