Replacement cost value (RCV) and actual cash value (ACV) are two loss settlement methods used by insurance companies to calculate claim payments on covered losses.
With actual cash value coverage, your claim reimbursement is based on the depreciated value of your damaged or stolen property.
With replacement cost coverage, your claim reimbursement does not factor in depreciation, meaning your payout is based on the value of similar property at today’s prices.
While policies with actual cash value coverage are typically cheaper, they provide lower claim reimbursements than policies with replacement cost coverage.
In homeowners insurance, replacement cost and actual cash value refer to how you’re reimbursed when you file a claim for property damage or loss. Property replacement cost is based on how much it would cost to replace with something similar at today’s prices, while actual cash value payouts are a calculation of the property’s replacement cost minus depreciation.
By default, a typical home insurance policy has replacement cost settlements for claims involving structures on your property, like your home or swimming pool, and actual cash value settlements on personal property claims. Though this replacement cost personal property coverage can often be added to your policy via coverage endorsement for a small additional fee.
What is actual cash value coverage?
Actual cash value coverage deducts depreciation when calculating your claim settlement for a loss. In other words, if something of yours is stolen or damaged by a covered peril and you file a claim, your insurer will factor in the property’s age or wear and tear into your reimbursement amount.
For example, say a basement pipe bursts floods your basement, damaging all of the furniture you purchased five years ago when you moved in. Your insurer would likely treat the loss as sudden and accidental water damage and agree to reimburse you should you file a claim. A policy with actual cash value coverage would reimburse you for the value of a five-year-old furniture set, which may be significantly less than the cost of a new one.
How to calculate actual cash value
Most insurers use an actual cash value formula to determine an item’s depreciated value, but a property’s ACV basically comes down to these two steps:
Calculate what it would cost to replace the property with something of similar kind and quality at today’s prices. This is also known as its replacement cost.
Subtract depreciation for age or wear and tear from the property’s replacement cost.
Depreciation is calculated based on an item’s lifespan, or how many total years of value it has. For example, if your five-year-old furniture set had a lifespan of 15 years, then you’d only be reimbursed for two-thirds of what you originally paid for it.
What is replacement cost coverage?
A policy with replacement cost value coverage pays to replace your damaged or stolen property with new property of similar type and quality. That means if your three-year-old laptop is stolen and you file a claim with replacement cost personal property coverage, your insurance will pay you for a new laptop — without deducting depreciation from the settlement.
Most standard home insurance policies provide replacement cost dwelling coverage and other structures coverage, and actual cash value coverage for personal property. Though some insurers may have stipulations around when more exposed parts of your home are eligible for replacement cost vs. actual cash value coverage.
Actual cash value vs. replacement cost roof coverage
Some insurers will only pay the replacement cost of a damaged roof if it’s under 15 years old. If the roof is older than 15 years or has visible cosmetic wear and tear, the insurer may only agree to cover the roof at its actual cash value. Depending on your insurance company, you may be able to upgrade to RCV roof coverage for an additional fee. Otherwise, you may need to repair or replace your roof to be eligible for this coverage.
Learn more >> How to estimate a home's replacement cost
ACV vs. RCV homeowners insurance
Overall, replacement cost is a far better form of coverage than actual cash value. An RCV policy will help replace damaged or stolen property with new items. Actual cash value coverage will only cover the depreciated amount, which means you’ll have to pay more out of pocket to replace everything. If you have the option of upgrading to personal property replacement cost coverage, we’d strongly consider paying the relatively small additional premium.
Keep in mind that when you make a claim with RCV coverage, most insurers will issue your claim payout in two checks: One for the actual cash value of your property, and then one for the recoverable depreciation of the property once you’ve expended the actual cash value funds. Here’s a look at how these three concepts work:
Actual cash value
Replacement cost value
What it is
The amount your home or property has depreciated in value since you first bought it.
The value of your property minus depreciation, or wear and tear.
The value of your property without deducting depreciation.
How to calculate
Replacement cost – actual cash value = Recoverable depreciation
Value of property – depreciation = Actual cash value
Actual cash value + recoverable depreciation = Replacement cost value
What is extended replacement cost coverage?
If you live in an area prone to natural disasters, you may want to consider adding extended replacement cost coverage to your policy to compensate for demand surge, or higher replacement costs in the aftermath of a disaster.
Extended replacement cost increases your home’s coverage limit an additional 25% or 50% (whichever one applies to your policy) in the event your house is destroyed and your dwelling limits aren’t high enough to rebuild your house to its original specifications. That means if your house is insured for $500,000 with an additional 25% in extended replacement cost coverage, you’d actually be insured for $625,000.
What is guaranteed replacement cost coverage?
Guaranteed replacement cost is similar to extended replacement cost, only there’s no 25% or 50% cap on how much it will pay out. In other words, it covers the cost of rebuilding your home regardless of the cost — even if it’s two or three times your policy’s dwelling coverage limit.