What is the Difference Between Actual Cash Value and Replacement Cost Value?

Many homeowners do not read their homeowners' insurance policy. Unfortunately, a covered loss, such as a fire or hurricane causes significant damage to the home. The homeowner, of course, files a claim with her insurance company. The homeowner eventually receives a claim settlement offer from the home insurance company. Only then does the homeowner understand the distinction between actual cash value and replacement cost coverage.

What is the difference between Actual Cash Value and Replacement Cost Value Coverage?

There is, in fact, a significant difference between the two. In other words, actual cash value coverage means exactly what it says. As a result, the insurance company will pay the homeowner the actual cash value (ACV) for damaged property.

For example, suppose you had a fire that damaged your kitchen. As a result, you'll need to replace a few appliances. Let's say you paid $1,500 for your refrigerator five years ago. Unfortunately, the refrigerator was destroyed by the fire.

However, given its age of five years, that refrigerator may have been worth only $750 on the day of the fire.

Of course, you'll want another comparable quality and type refrigerator to the one you bought five years ago. However, you will have to pay the extra cost for the new refrigerator out of your pocket.

Certainly, there are instances where the replacement cost and actual cash value of older appliances, televisions, and so on may be high.

If you had replacement cost value (RCV) coverage, the insurance company would pay the cost of a new refrigerator of comparable type and quality. In this case, the insurance company would make the first payment of $750 based on the ACV.

The homeowner then sends proof of purchase to the insurance company after purchasing the new refrigerator. As a result, the insurance company sends the homeowner a second check. That check is for the amount of the purchase that exceeds $750. That is true even if it is more than the refrigerator purchased five years ago.

So, should you get Actual Cash Value or Replacement Cost Coverage?

Obviously, in the above scenario, the homeowner with RCV insurance will fare better. Of course, the total cost of replacing the damaged property with comparable quality property could be significant.

RCV coverage, on the other hand, means higher premiums—but it may be worth it.

As a result, people who own expensive electronics, furniture, appliances, and so on may want to consult with their insurance agent. They can purchase RCV coverage for personal property.

On the other hand, Dwelling coverage refers to coverage for the home itself. Typically, structure coverage would pay to replace damaged portions of the house at RCV.

However, in particular high-end homes, the cost of replacing costly molding or ornate railings may not be completely covered.

As a result, homeowners may want to consider purchasing extended replacement coverage. Extended coverage will pay an extra 10% to 20% of the policy limit.

The homeowner can also purchase a more expensive endorsement. This is known as guaranteed replacement coverage. As a result, the homeowners' insurance company will cover the full cost of replacing or repairing damaged parts of the house.