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Replacement Cost Vs Actual Cash Value

Carl Pash

Carl Pash

Carl Pash is the President of Alliance Insurance of the Rockies and has over 25 years of experience working with insurance claims. Carl has a mission to match customers with the best insurance products through personally getting to know his customers, allowing him to protect their financial security.

If you were to have an insurance claim tomorrow, are you aware of how your claim would be covered? 

At Alliance Insurance of The Rockies, we believe that, as the holder of an insurance policy, you should never be in the dark or scared to discover what will happen in the event of an insurance claim. We have dedicated ourselves, not only to provide you with great, individualized coverage but additionally with the knowledge and assistance needed to fully understand your policy and be prepared for a claim. In order to help you understand your policy and provide insight into a common issue, we have developed this blog post explaining the difference between replacement cost and actual cash value. 

Replacement Cost Vs Actual Cash Value

Most commonly, when a claim is made on a policy, the policy will start with the actual cash value for the payment method. This means that, when damage is inflicted on your home and you make a claim on the insurance policy, chances are you will be receiving the actual cash value of the damaged product.  

For example, if your car was totaled as a result of an auto accident, you would be paid on an Actual Cash Value basis. However, some companies have made endorsements available to add to your policy for newer vehicles that allow for alternative options. Therefore, it is critical for you to examine your policy and check with your agent to see if this is available and how much it would cost to add an endorsement to your policy.

Actual Cash Value  

Actual cash value (ACV), also known as market value, is the standard that insurance companies arguably prefer when reimbursing policyholders for their losses. The actual cash value is equal to the replacement cost minus any depreciation (ACV = replacement cost – depreciation). It represents the dollar amount you could expect to receive for the item if you sold it in the marketplace today. The insurance company determines the depreciation based on a combination of objective criteria (using a formula that takes into account the category and age of the property) and subjective assessment (the insurance adjuster’s visual observations of the property or a photograph of it). 

For example, if you have a TV that is 5 years old, they will pay you for what a 5-year-old TV could be purchased for today, using the same specifications, year make model, etc.

Replacement Cost Endorsement  

Even if you have a Replacement Cost endorsement on your policy, you would be paid the amount to replace the item with a similar item. 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. Payment for the 5-year-old TV would be paid based on the closest TV of the same specifications at the current prices. In layman’s terms, you would receive money for a new TV with similar specifications and features rather than the current value of your 5-year-old TV. 

Actual Cash Value Vs Replacement Cost Home Insurance

In the event of an insurance claim made on a home insurance policy, homeowners should know how their policy reads and if it has been endorsed to allow for replacement cost. It is not uncommon for portions of your home to be insured for Actual Cash Value versus Replacement Cost. This is routinely done on the roofs and specific contents of the house. In the case of a roof that is covered with actual cash value rather than replacement cost, the homeowner may not receive the full amount needed to replace the roof in the current market. 

Understanding Your Insurance Policy  

With our examples of the roof value and TV value being paid at different rates based on the policy, it is critical for policyholders of both homeowner’s insurance and car insurance to be sure they know how their claim would be covered before the issue arises. Once the claim occurs, you will be paid on the method that is outlined in your policy. Unfortunately, because the policy is a legal document, there will not be any way to alter it after the claim is made and the insurance company will be obligated to follow the policy’s agreement as it is written. Your policy and endorsements should tell you what you have on your insurance policy. As always Alliance Insurance of The Rockies is here to help if you have questions on what your policy entails.

Actual Cash Value Insurance

One thing to note when you make a claim is most carriers will make the initial payment at the actual cash value, even if you have replacement cost on your policy. They will then pay you the amount deferred when you can show you had the property repaired or purchased the replacement for it. The insurance adjuster should explain the process to you.

 Home And Auto Insurance Brokers | Alliance Insurance Of The Rockies

At Alliance Insurance of The Rockies, we are proud to be your advocates and serve you with professional advice on the best insurance policy on the market. Whether you are in need of auto insurance, home insurance, or just a better perception of your policy and how it works, our team of dedicated insurance brokers has your back. As a locally owned insurance company in Colorado Springs, we want to help educate and assist you in any way we can when it comes to anything home or auto insurance. If you are ready to switch insurance providers or need clarification about your policy specifics give us a call today!

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