Actual Cash Value versus Replacement Cost Insurance

ACV-vs-RCVThe question of Actual Cash Value versus Replacement Cost comes up a lot when a client is considering the purchase of an older property. The client may only want to insure the building for the current market value, not what it would take to rebuild from scratch. An actual cash value policy typically costs less in premium, but to get a better understanding of both options, let’s dig a little deeper.

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, but as stated above, minus any depreciation. An 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).

The term “replacement cost” means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose without the deduction of depreciation. Meaning the insured can replace the property in today’s market and be brought back to pre-loss condition.

In short, Actual cash value also means exactly what it sounds like. It’s the actual cash value of an item, as opposed to what it would cost to replace that item with a brand-new version, or replacement cost. So, the only difference then between replacement cost and actual cash value is the deduction for any depreciation. However, both options are based on the cost today, to replace the damaged property with new property.