Actual Cash Value vs.
Replacement Cost Coverage
A few scenarios are below to better your understandings...
How it Works
Homeowners insurance policies offer
actual cash value or replacement
cost coverage to replace your damaged,
stolen, or destroyed personal
• Replacement cost is what you
would pay for the item at today’s
• Actual cash value is what you
would pay for a similar item at
today’s cost minus depreciation
(replacement cost minus
• Depreciation is a decrease in value
due to wear and tear or age.
Your home and some furnishings
were damaged during a recent wildfire.
You made a claim to your insurance
company and have met your
deductible. Now you are looking at
replacing the damaged furnishings.
Last year, you bought a sofa for your
living room for $2,000. The amount
of money you will receive to replace
your sofa depends on the type of
coverage you have.
• If you have actual cash value
coverage, the company might pay
you $1,500 because that is the
actual cash value of the sofa today
(replacement cost minus depreciation).
• If you have replacement cost coverage,
the company will pay $2,100
because that is what it would cost
to buy a similar sofa today.
Note: If you have replacement cost coverage,
most insurance companies
will give you the actual cash value
of an item and require you to submit
a receipt for the new item before
paying you the remainder.
• With actual cash value coverage,
you will receive a payment from
the insurance company for $1,500.
• With replacement cost coverage,
you will first receive a payment
from the insurance company for
$1,500. When you submit your
receipt for the sofa, the company
will pay for the difference between
$1,500 and the amount you paid to
replace the sofa up to $2,100.
$2,100 = Amount of the receipt
for your new sofa
$1,500 = Actual cash value of
the sofa and amount sent to you by
the company after you filed a claim
$600 = Amount the company
will send you after you submit a
receipt for $2,100
What Does "Replacement Cost" Mean?
The term "replacement cost" is defined or explained in the policy. Simply stated, it means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose. This applies unless the limit of insurance or the cost actually spent to repair or replace the damaged property is less. Refer to your policy for the exact definition and explanation of replacement cost.
What is "Actual Cash Value"?
The term "actual cash value" is not as easily defined. Some courts have interpreted the term to mean "fair market value," which is the amount a buyer would pay a seller if neither were under undue time constraints. Most courts, however, have upheld the insurance industry's traditional definition: the cost to replace with new property of like kind and quality, less depreciation. Courts have varied in their rulings as to whether or not depreciation includes obsolescence (loss of usefulness as a result of outmoded design, construction, etc.).
So What's the Difference?
The only difference between replacement cost and actual cash value is a deduction for depreciation. However, both are based on the cost today to replace the damaged property with new property.