Cost & Coverage
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Understanding the actual cash value and replacement cost provisions in your home insurance policy.
Your home insurance policy’s declarations page lists all of your coverages and the maximum amount that you can be reimbursed for when you file a claim after a loss. Your dec page also states how you’re reimbursed for property loss: whether it’s for an item’s replacement cost (RCV) or actual cash value (ACV).
For example, say a house fire destroys a sofa you just purchased two years ago for $3,000. When you’re filling out your claims form, you’ll list the sofa’s $3,000 purchase price. What you probably want is to be reimbursed for that amount. If the personal property coverage in your policy is replacement cost, then that’s what will happen.
However, if your claim settlement terms is for an item’s actual cash value, your payment will be less than the $3,000 you initially paid for the sofa. That’s because actual cash value only reimburses you for the sofa’s replacement cost after two years of depreciation, or wear and tear, has been reduced from the value. If your insurance company determines that two years of use reduced the sofa’s value by $500, then your payment would be $2,500, less your deductible.
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Actual cash value refers to the current value of property measured in cash. Insurance adjusters typically arrive at the ACV amount by taking the replacement cost and deducting depreciation that’s brought about by wear and tear and age.
In the sofa example, the adjuster didn’t arrive at the depreciation amount by inspecting the couch. (In fact, in the case of total losses, your adjuster typically won’t have much to observe at all.) The adjuster’s actual cash valuation is generally based on an item’s “life span”, or how many years of value it has. If the $3,000 sofa had a 12-year life span, then $250 would be deducted from its ACV every year; a two-year-old sofa means $500 in depreciation and a $2,500 ACV.
In most standard homeowners insurance policies, your personal property loss settlement terms are actual cash value. That means you’ll get a depreciated claim check for your furniture, electronics, and even certain types of valuables like jewelry and vintage instruments (up to their applicable sublimit) in the event of a covered loss.
However, just about every insurer will let you upgrade this part of your policy to replacement cost coverage for an additional amount — typically an extra $100 annually. Your dwelling and other structures (in most cases) are already covered for their replacement cost, so if your insurer asks if you want a “replacement cost policy”, they’re probably asking if you want RCV for your personal belongings.
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Replacement cost is a payment equal to the amount you’d pay to replace whatever was damaged or stolen at today’s cost. To go back to the sofa example, rather than the depreciated amount of your $3,000 sofa, your claim check would be for the cost of a new sofa of similar make and model, up to your personal property coverage limit. The initial check you receive will most likely be for the sofa’s actual cash value, and then once you’ve proved you purchased the claimed item, your insurance company will send you the remaining amount.
As we already went over, a standard HO-3 policy is replacement cost dwelling, and your other structures coverage generally follows your dwelling form. Make sure you check the fine print of your policy to see how you’re reimbursed for each coverage component.
That fine print may also have some stipulations for replacement cost reimbursements. Certain parts of your residence — like your roof, or built-in appliances like your water heater or dishwasher — may need to meet certain criteria in order to be covered by their replacement cost. That could mean your insurer has certain “life span” criteria for an appliance older than 15 years, or it could simply mean they won’t cover your roof for its replacement cost if it already has visible signs of wear and tear.
Additionally, for certain types of personal property, like expensive art, electronics, or fine furs, simply getting replacement cost coverage won’t be enough. Standard policies typically only cover rare or expensive valuables up to a couple thousand dollars. In order to get your expensive stuff fully covered, you’ll need to itemize these belongings under a scheduled personal property endorsement.
If your insurer has restrictions on replacing your roof or appliances for their replacement cost, you’ll have to decide whether you’re fine being insured by their actual cash value, or if you’d rather replace them now and be fully covered. However, some insurers, like Nationwide, have endorsements you can add to your policy that cover your roof’s replacement cost regardless of its age or condition.
Interested in upgrading the reimbursement terms in your policy? Look no further than Policygenius, where insurance experts can hook you up with a policy that ensures you’re getting proper protection for your expensive valuables.
Your homeowners insurance company may give you the option of upgrading your replacement cost dwelling coverage to extended or guaranteed replacement cost to cover sudden increases in construction costs that push the rebuild expenses above your covered policy limit.
An extended replacement cost policy increases that limit a certain percentage — typically 25% or 50% your dwelling limit, to cover that potential spike in prices, while a guaranteed replacement cost policy pays to rebuild your home regardless of how much it costs.
If you live in a natural disaster-prone region of the country, extended replacement cost may be worth looking into, as large-scale catastrophes tend to cause a temporary increase in construction and labor costs.
Generally speaking, replacement cost is a better form of coverage, as it allows you to replace your stolen or damaged stuff with equivalent items and go on with life the way it was before your loss. If you can afford it, go with replacement cost.
But depending on where you live and the kind of risks you face, replacement cost may cost significantly more than actual cash value protection. Furthermore, if you’re a new homeowner and you simply don’t have that much stuff, or the stuff you have is new and you’re okay going a few years with slightly less protection, then ACV may be worth it for the decreased insurance costs.
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