What is “Actual Cash Value” vs “Replacement Cost Value” in property insurance?

When you’re purchasing an insurance policy for your property you will likely be given many different choices provided by different carriers. Deductibles, coverage amounts, and annual premiums will all vary in different ways. But, it’s important to know how the value of the damage will be measured when its time for your insurance carrier to make a payment for your insurance loss. These options come in two flavors: “Actual Cash Value” or “Replacement Cost Value”. In order to understand the difference between the two, you must first understand what Replacement Cost Value is.

“Replacement Cost Value” or RCV

Replacement Cost Value (or “RCV”) determined by measuring what it would cost to replace the damaged structure on the same premises. When determining RCV, you only examine the cost to replace the damaged item without looking at the condition or age of the damaged item. For example, if your wall is broken, the replacement cost value of the damaged property is going to be whatever it costs to fix that wall in the same or similar condition it was before it was damaged. For example: if your 10-year-old shingle roof gets ripped off during a hurricane, then the value of that loss is cost of replacing that missing roof with a new shingle roof. It doesn’t matter how old your roof was when it got destroyed. If it costs $20,000.00, then the RCV of the loss is $20,000.00.

“Actual Cash Value” or ACV

“Actual cash value” is generally defined as “fair market value” or replacement cost minus normal depreciation,” where depreciation is defined as a “decline in an asset’s value because of use, wear, obsolescence, or age.” With these definitions, actual cash value could be measured in different ways:

First let’s talk about Fair market value. Fair market value is what the damaged property would cost if you were examine other properties of like kind and quality. For example, appraisers in the real estate market will inspect your property, then compare it to similar properties in your neighborhood, then determine the value of your property. Another example is when you’re looking to buy a used cell phone on Ebay or Amazon, the market will dictate the value of that item or good. Fair market value can be a wide range of valuations that take in consideration different variables such as the age, quality, availability, and condition of a piece of property.

However, Insurance companies commonly determine Actual Cash Value by using the “RCV minus depreciation” approach. This is accomplished by looking at the damaged property and determining what it will cost to fix it or replace it using like-kind quality materials. In practice they first determine how much it would cost to replace the property and assign it a dollar value (“RCV”). Then they subtract an amount which takes in consideration of how old, used, or worn out the property was before it was damaged (Depreciation). Let’s look at the breakdown using a VERY simple example of $600 cabinets.

The Value of New Cabinets of similar type RCV $600
Given the age, condition, and wear of the cabinets, we’ll say they cabinets were depreciated about 10% Depreciation $60 (10%)
New cabinets – depreciation = ACV ACV $540

Somehow, the adjuster found like-kind and quality cabinets for $600. Then the adjuster will examine the damaged cabinets, maybe see a bit of wear and tear, and determine that the cabinets were somewhat old and will estimate and apply 10% depreciation amount to the valuation. Subtracting the 10% ($60) of $600 dollars comes to an actual cash value payment of $540. This is basically how these determinations are made in the property insurance industry.

Here’s a tougher example: Let’s say when you bought your home it already had kitchen cabinets installed. One day your home suffers a covered loss and part of that loss includes your kitchen cabinets. Now you have damaged kitchen cabinets and have no idea what it cost to get those cabinets installed. How do you determine the value if those cabinets are no longer manufactured? This should not be an issue if you’ve hired a qualified adjuster, contractor, or cabinet installer. The professional would only need to explore the market for new cabinets which are the same quality and condition as the ones you had. This is usually achieved by using estimating software based upon the dimensions of the cabinets. Then they would just use that value in order to determine the actual cash value or replacement cost value of your loss.

1Trinidad v. Florida Peninsula Ins. Co., 121 So.3d 433, 438 (Fla 2013).
2It will matter to an insurance company for the purposes of whether the damage is covered.
3Id. at 438 citing Black’s Law Dictionary 509, 1690 (9th ed. 2009).
Christopher WatsonWhat is “Actual Cash Value” vs “Replacement Cost Value” in property insurance?
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