Image of house fire demonstrating the difference in replacement cost vs. actual cash value

By Zac Little & Gray Secrest

Insurance agents wear a lot of hats to do their jobs effectively and ethically. Any agent’s most significant role is that of advisor to each client. To know what your insurance does to help you, you have to understand how your policy works and the coverages included or excluded in that policy. That’s where your agent advisor comes in. One crucial part of insurance coverage we frequently help our clients understand is replacement cost vs. actual cash value (sometimes called ACV). 

Icon representing insurance replacement cost coverage

Replacement Cost Coverage

Helps cover the cost of replacing damaged property with a new item of similar kind and quality without deducting for depreciation up to the policy’s coverage limit.
You don’t pay out-of-pocket to replace what was lost.

Icon representing insurance actual cash value coverage

Actual Cash Value Coverage

Helps replace damaged or destroyed property, considering depreciation.
The insurance payout is much less than the cost of buying a new replacement item, as it factors in wear and tear, age, and market value.

Replacement Cost Coverage

Replacement cost coverage helps cover the cost of replacing damaged property with a new item of similar kind and quality without deducting for depreciation.

This pertains primarily to policies like homeowners and commercial property insurance. With replacement cost coverage, if your property is damaged or destroyed by a covered loss, you will be reimbursed for the total cost of replacing the property up to the policy’s coverage limit. This means that you can replace your damaged property (like your house or your commercial investment property) with a new one that is similar in kind and quality without paying out-of-pocket for depreciation or the difference in cost between the old and new items.

Imagine your home is insured with replacement cost coverage and is damaged by a fire. The insurance company will pay for rebuilding your home to its pre-loss condition. That includes materials, labor, and other associated expenses. Similarly, your personal belongings can be covered under replacement cost coverage. If they are stolen, insurance will reimburse you for the cost of purchasing new items to replace the stolen ones.

Actual Cash Value (ACV) Coverage

Actual cash value coverage helps replace damaged or destroyed property, considering depreciation.

Unlike replacement cost coverage, ACV coverage considers the age, condition, and depreciation of your lost or damaged property at the time of the loss. The insurance company determines the value of the damaged property by subtracting the depreciation from its original cost. You’re reimbursed based on the actual cash value of the damaged property. This means the insurance payout is much less than the cost of buying a new replacement item, as it factors in wear and tear, age, and market value.

Imagine your five-year-old television is stolen, and you have ACV coverage. The insurance company will evaluate the value of the television at the time of the theft, considering its original purchase price, the expected lifespan, and the depreciation over those five years. ACV coverage generally has lower premiums than replacement cost coverage since it considers the depreciation of the insured property. However, it’s important to note that with ACV coverage, you may need to cover some out-of-pocket expenses if you want to replace your damaged property with a new item, as the insurance payout may not be sufficient to cover the total cost.

In most cases, ACV coverage will result in what’s known as a coinsurance penalty on paid claims. Coinsurance states that if you are insured under 80% of the full replacement cost of the item, whether it’s a home, engagement ring, or TV, the insurance company can penalize you by reducing the amount of the paid claim.

We advise nearly all our customers to carry replacement cost coverage on their personal and business properties since it can help secure a living or work situation resembling their previous home or business when and if a loss happens.

If you’re curious about the current coverage on your home, business, or investment property, contact us to learn what the reconstruction cost would be and whether or not you’re covered the way you want to be.