What is the difference between Replacement Cost and Actual Cash Value?
A. Not so many years ago, property was customarily written on an actual cash value (ACV) basis and even today, the vast majority of automobile physical damage coverage is still written that way. ACV is the standard applied for purposes of property valuation, and adjustment of losses. Replacement cost valuation (RCV), insurance was developed to provide greater protection than is available under policies using ACV.
Replacement Cost means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose. Actual Cash Value (sometimes referred to as “fair market value”) is the cost to replace with new property of like kind and quality, less depreciation. Both are based on the cost today to replace the damaged property with new property.The only difference between replacement cost and actual cash value is a deduction for depreciation.
“Replacement cost” is what you would have to spend to reconstruct your home or business property using materials of the same kind and quality on the same site where the structure was destroyed, without deducting any amount for depreciation. (Depreciation is the loss in value that occurs as items age, wear out, or become obsolete, and represents the value that has been “used up” prior to the occurrence of a loss.) “Actual cash value” is replacement cost minus depreciation. In determining the actual cash value of a home or business property, the general condition, state of repair, and “character” of the structure are taken into consideration. The value of land is not included in replacement cost and actual cash value amounts because the land itself is not damaged during most of the loss situations covered by an insurance policy. In many instances, replacing a home, possessions, business property and/or inventory costs a great deal more than the total of the actual cash value. Often, buil
A. There are several different methods by which an insurance carrier may calculate the amount they will pay you for a loss. Payment based on the replacement cost of damaged or stolen property is usually the most favorable basis to be insured by from the insureds standpoint, because replacement cost compensates the insured for the actual cost of replacing your property. If an insureds computer is stolen, a replacement cost policy will reimburse you the full cost of replacing it with a computer of like kind. The insurer will not take into consideration the fact that you have been using the computer every day for the last two years, causing a considerable amount of wear and tear. Essentially, having a policy that is covering an insured on replacement cost may be more expensive than a policy based on actual cash value but the coverage is more advantageous to the insured should a loss occur. In contrast, actual cash value or ACV, also known as market value, is the standard that insurance co
