Here is How it Works
Homeowners insurance companies offer two types of insurance policies to replace your damaged, stolen, or destroyed property. They offer actual cash value (ACV) or replacement cost coverage (RCC) policies. The following terms are important in understanding the difference between the two types of coverage:
- Replacement cost is what you would pay for the item at today’s cost.
- Actual cash value is what you would pay for a similar item at today’s cost minus deprecation (replacement cost minus depreciation).
- Depreciation is a decrease in value due to wear and tear or age.
Your home and some of your furnishings were damaged during a recent wild fire. You made a claim to your insurance company and have met your deductible. You are now looking to replace your damaged furnishings. Two years ago you bought your refrigerator for $2,000.00. The amount of money your insurance company will have to pay you for your refrigerator depends on which type of policy you have.
Actual Cash Value—Let’s say for this example the insurance company calculates the depreciation on your refrigerator to be $500.00 and replacement cost today is $2,100.00. If you have an actual cash value policy (ACV), the insurance company might pay you $1,600.00 because that is the value the refrigerator at today’s cost ($2,100.00) minus the depreciation ($500.00).
Example: ($2,100.00 - $500.00 = $1,600.00
(Replacement Cost) - (Depreciation) = (Actual Cash Value)
- Replacement Cost Coverage—If you have a replacement cost coverage policy (RCC) and you go and price a replacement refrigerator that is similar to the one that was destroyed and it now cost $2,100.00, the insurance company will pay you the $2,100.00 because that is what it will cost to buy it today.
*Note: If you have replacement cost coverage (RCC) the insurance company will likely hold back the depreciation and pay you the actual cash value of the item. The insurance company will then require you to submit a receipt for the new item before they will pay you for the remainder. Using the above example involving the replacement of your refrigerator the insurance company will initially give you a check for the “Actual Cash Value” of $1,500.00 and then the additional $600.00 to make up the “Replacement Cost” when you send them a copy of the receipt showing you actually purchased the new refrigerator for $2,100.00.