Actual Cash Value vs Replacement Cost – What’s the Difference?

We hope you are ready; we are going to cut straight to the point this time around…we have a lot to cover, and we all have things to do and places to be SO, let’s just hop to it:

If you have had a homeowner’s claim it is likely you have heard the terms “Replacement Cost” or “Actual Cash Value.”  Insurance has all sorts of fancy terminology, and these are just a small piece of the insurance lingo pie, but understanding what they mean and the difference between them is important!

So, what is Actual Cash Value?

Actual Cash Value (ACV) is the value of an item prior to loss. Using a couch which was damaged as an example: This is not how much it would cost to purchase a new couch but how much the couch you had was worth in its condition before being damaged. If your couch was 10 years old the ACV will reflect what a 10-year-old couch would be worth, with depreciation factored in. Simply put, ACV is the price you could probably get if you had listed it for sale.

Moving on, what is Replacement Cost?

Replacement Cost is how much it would cost to replace your lost property with an item of like, kind, and quality. Let’s use the couch example again. Insurance will pay for a new couch similar to the couch that you lost. If you had a leather 3-seater couch with no recliners, insurance would pay for another leather 3-seater couch with no recliners. We will not pay for you to get an upgrade on your couch.

Let’s put these two ideas together and hopefully we’ll make it all make sense.

Most standard homeowner policies come with ACV coverage. Meaning if something were to happen you would be paid for what your damaged property was worth prior to the loss. Replacement Cost is something that must be added to a policy if you prefer this kind of coverage, it does NOT come standard.

In a scenario in which you have ACV but have also added replacement cost coverage it would look something like the following (we will continue to run with the couch example, it just makes it easier):

With both of these coverages on your policy, it’s a two-step process. First, we would pay you the ACV amount for the damaged couch. You can take that money and do as you choose with it. You can buy a couch, or you can simply pocket the money if you prefer (that’s up to you). Then, if you do choose to replace your couch you would be reimbursed for the remaining balance up to the Replacement Cost amount (you’ll need to provide a receipt). Now, that doesn’t mean you cannot upgrade your couch to something bigger, fancier, or techier than what you had, it just means that insurance will only pay for what you had, you are welcome to get an upgrade and cover the difference yourself.

Get it? Got it? Good. JUST KIDDING!

We know it was a lot of information! If you are still confused or are needing a little more insight to keep things straight take a look at our informational video about this lingo or contact your agent!

Get more info and watch our video now: https://www.youtube.com/watch?v=YuSZNJrFA1M

Have any questions about what you just read? Please contact your Independent Insurance Agent or email us at socialmedia@psmic.com!

Disclaimer: This is a general interpretation of processes and coverage. All claims are subject to Insuring Agreements, Endorsements, Exclusions, Terms, and Conditions of the Policy.