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Actual Cash Value vs. Replacement Cost

By February 24, 2016Blog

Most people purchase their property insurance and just assume that they are buying replacement cost for their building and don’t give it a second thought. But there is another option for their insurance. It is actual cash value (ACV).

Actual cash value is defined as replacement cost minus any depreciation (ACV = replacement cost – depreciation). This depreciation is actual obsolescence instead of accounting depreciation that most people are more familiar with. This may also be similar to market value or in the case of a vehicle, blue book value. Although in a high valued real estate market, market value could be anywhere.

But since most people buy replacement cost coverage, let’s define this.

Replacement cost is the actual cost to rebuild a property as determined at the time of loss, not the inception of the policy. The actual definition may vary depending on the insurance carrier. Since the cost of construction can change from year to year, it makes good since to revalue your property and keep your insurance company apprised of changes.

So What Are the Pros and Cons?

With replacement cost coverage, the insurance carrier will require that the property be insured for usually at least 80-90% of the replacement cost of a property. This could lead to a high amount to insure for, which may be higher than an actual purchase price. This in turn could lead to a higher premium.

With actual cash value, the insurance carrier may be able to use a valuation closer to the ACV which may result in a lower insured value and possibly a lower premium.

But in the event of a claim, this is the biggest difference. In replacement cost, the insurance carrier will pay to repair or rebuild a property based on the cost of replacement. The carrier will usually pay the ACV amount until the repairs are made than they will issue a supplement payment to bring the total claim paid to the replacement amount less the deductible.

In actual cash value, the carrier will only pay the ACV or depreciated amount of a claim less the deductible, which will most likely not be enough to completely pay for repairs or rebuild a property. This last comment is why most mortgage companies will require a client to purchase replacement cost.

There are some other methods to value a property for insurance purposes, but these are the main two valuations methods typically seen.

For more information on your property insurance, contact Ramey King Insurance at 800-453-9691, visit our website at or visit our office at 320 Eagle Drive, Ste 210, Denton, TX 76201.