Replacement Cost vs. Actual Cash Value

No matter what type of insurance you’re shopping for, you’ll notice some differences between insurance companies regarding reimbursement – particularly if a covered item is regarded as a total loss. We’re talking about replacement cost and actual cash value (ACV).

Actual cash value tends to be the preferred method of reimbursement for most insurance companies – so you’re likely to come across the term more often. When an insurance company offers to reimburse you for an item’s ACV, they calculate the amount by finding how much it would cost to replace the item, then deduct any depreciation of the insured item from that cost. An easier way to think about it would be to imagine trying to sell your insured item as “used” to a discerning buyer. The amount of payment you would get from such a transaction is similar to what an insurance company would pay as an ACV reimbursement. For this reason, ACV is also referred to as “fair market value.”

Replacement cost is the same thing, but it does not factor in any depreciation; you are reimbursed for the amount it would cost to purchase an equivalent, replacement item. Depreciation can easily affect many items and really lower the compensation coverage. Also, replacement cost can be paid out much faster, but an insurance adjuster must inspect the item before issuing an ACV and paying out later. For these reasons, replacement cost is considered to be the superior coverage.

But, please note that different insurance companies will tweak the meanings of replacement cost and ACV in the description of coverage for your policy. There could also be exceptions regarding the compensation (e.g. if an item’s replacement cost exceeds the policy limit, then you can not be fully reimbursed). Always be sure to review your insurance policy carefully to make sure that it meets your needs.  

 This content is offered for educational purposes only and does not represent contractual agreements. The definitions, terms and coverages in a given policy may be different than those suggested here and such policy will be governed by the language contained therein. No warranty or appropriateness for a specific purpose is expressed or implied.

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