Replacement Cost and Actual Cash Value

Buying insurance requires a certain amount of research before you even begin comparing insurance quotes and part of that research is learning the terminology associated with different types of insurance, including auto, home, life, health and renters. Two terms that might not be completely understood are “replacement cost” and “actual cash value.” These refer to the coverage of your possessions, including your home and automobiles, and how you are reimbursed in the event of a claim on an insured possession.

Actual Cash Value

Actual cash value does not have a hard and fast legal definition, but the insurance industry defines the term as the cost to replace the insured item with an item of similar kind and quality with depreciation of the insured item deducted from the amount. Simply put if your home is burglarized and the television you bought in 1998 is stolen in 2009, with actual cash value insurance your insurance provider will reimburse you for what they determine a like-kind replacement will cost minus nine years of depreciation on the television that was stolen.

Depreciation is where actual cash value insurance claims can be a bit murky. Most courts honor the insurance industry’s definition of the term, but there is a legal gray area of what counts as depreciation, particularly the concept of obsolescence.

Replacement Cost

Replacement cost insurance is much more straightforward. Your policy will provide specific details on what the term means, but essentially replacement cost insurance will cover the amount needed to replace the lost item with another of similar kind and quality used for the same purpose. With replacement cost insurance no depreciation is taken from the claim amount. Replacement cost can also be applied to repairs, such as for damaged auto parts

As you might guess, replacement cost insurance is more expensive than actual cash value, but in the event of a claim you receive more money and it allows you to quickly replace the lost items without additional out-of-pocket expenses.

Did you know? The accounting term “book value” has absolutely no bearing on insurance claims involving your possessions.

Takeaways:

1. Actual cash value insurance is essentially the replacement value of the lost item minus depreciation.
2. Replacement cost insurance provides exactly what it sounds like – the replacement cost of a lost item without any depreciation deducted from the claim amount.
3. Replacement cost insurance is more expensive than actual cash value insurance.

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