Homeowners’ Insurance: Actual Cash Value vs Replacement Value

Many of us are in a constant search to find out the value of something. We may negotiate for a used car, look up the value of an antique chair or have a property appraised for financing. Most are just “guesses” or reasonable estimates, however. In fact, someone once said the real value of anything is what another person is willing to pay for it. That’s an interesting concept but not practical when it comes to insuring a property and its contents.

Even in homeowners’ insurance policies, there are differences in how the value of a property is determined. This is important to understand when it comes to the amount your property is insured for should you experience a loss. Your property is either insured up to its replacement cost or its actual cash value (ACV), and the difference can be significant.

Replacement cost or replacement value is determined by the actual costs of replacing any property lost in a claim. Whether it is the structure itself or a computer or electronics, the amount of the claim will be paid on what it takes to physically replace lost or destroyed property.

On the other hand, actual cash value is the value of any lost items minus depreciation. Let’s say you paid $1,000 for a sofa 5 years ago. Its value after depreciation may now only be $200. That is the amount you would be paid for the used sofa. It will be challenging to replace your personal items based on actual cash value.

Another way to view it is that replacement costs will allow you to replace losses with new items at a store. Actual cash value may force you to replace your items at a garage sale.

As you can imagine, this can make a huge difference in your claim’s settlement. How accurate of an inventory you have of your personal items will also make a big difference in establishing your claim.

If there is any doubt about your homeowners’ insurance coverage, please contact us. As an independent insurance agency, we are qualified to review the policies issued by any company. We can help you determine whether your losses will be covered to actual cash value or replacement value and to what limits they are covered. There is no cost or obligation for a homeowners’ insurance policy review so don’t take chances. Contact us today!