When you have renters insurance, if your belongings are damaged or stolen, the renters insurance company will reimburse you for the cost of replacing each item, either by writing you a check for the cost of the item or sending you an item to replace it.
The insurer will decide what it owes you for each item based on the type of coverage you purchase. There are two predominate provisions: replacement cost value (RCV) and actual cash value (ACV). The former obligates the renters insurance company to reimburse you for the full value of the item, which means if you lost a TV that was worth $1,000, you’re going to get either that exact same TV or $1,000 to replace it. If your policy instead has the actual cash value provision, the amount you get reimbursed is reduced by the amount the item has depreciated. If the $1,000 TV has depreciated by $500, you’ll only get reimbursed $500.
For that reason, getting a replacement-cost policy is the most advantageous way to purchase renters insurance. You don’t want to pay premiums all that time only to find that your stuff won’t be replaced at the price you paid for each thing or have to settle for a lesser item.
However, that means RCV insurance policies are more expensive than ACV policies. If that means you’re more interested in the latter type, check out our guide to ACV policies.
Replacement cost value summed up
When you file a renters insurance claim, how much you get paid by the renters insurance company is a factor of a lot of different components. In order to limit your own liability, you’ll want to purchase renters insurance coverage that meets your needs: how much of a deductible you can afford, how much you want the insurer to pay for, and whether or not depreciation should be factored into the final reimbursement amount. The more favorable the terms are to you, the more likely you’ll pay higher premiums.
With a replacement-cost policy, you’re asking the renters insurance company to pay for cost of reimbursing the item as new. But you’re still subject to a deductible, which is the amount you’ll pay out of pocket before the insurer covers the rest. The most common deductibles in renters insurance are $500 and $1,000. Once you reach the deductible, the insurer will pay out its remaining obligation. If you had a fire, for example, and it destroyed $20,000 worth of your belongings (make sure you have a home inventory), but had a $500 deductible, the renters insurance company will give you $19,500.
But let’s return to the example of the $1,000 TV. Say you got burgled and someone stole only the TV. Under the replacement-cost policy, you’re entitled to the full $1,000 reimbursed. However, you still have to reach your $500 deductible, which means that the insurer is only obligated to pay the remaining $500. If that TV model has gone down in price but still costs more than $500, the insurer may just write you a check for the $500 it’s obligated to pay that you can later apply to buying the TV model again if you want. In other cases, the carrier may replace the TV for the full $1,000 cost, but you’ll have to write the insurer a check for $500 to cover your deductible.
However, that’s still more cost-effective than an ACV policy. Under that type of policy, the insurer will estimate how much the $1,000 TV has depreciated, which could mean subtracting hundreds of dollars from its value after years of use. After factoring in your deductible, you could be left with very little to be reimbursed or even nothing at all. Under an ACV policy, if that $1,000 TV currently costs $750 today, after accounting for the deductible the insurer is only liable for the remaining $250.
Replacement cost value is especially effective when multiple items are damaged or lost, because you only need to meet that deductible once. After that, you’ll start receiving your reimbursements for the cost of item as if it were new, up to the item’s limits of liability. So let’s say you have a $1,000 TV, a $1,000 laptop, and a $1,000 bed that are all destroyed in a covered peril. You have to meet a $500 deductible, so you can get a new $1,000 laptop, a new $1,000 bed, and a check for $500 to put toward a new TV, regardless of how much each item has depreciated since you purchased it.
How replacement cost value handles items that can increase in value
Under an RCV insurance policy, you won’t have to worry about depreciation. But what happens if your belongings have appreciated in value, as happens with some collectibles, rare items, and antiques? Even under a replacement-cost policy, you probably won’t get the appreciated value back.
That’s due to two reasons. The first is the policy’s limits of liability, or the maximum amount the renter’s insurance is obligated to pay after you reach your deductible, which are determined by how much renters insurance you need. Each policy has limits of liability for certain items, including collectibles, like baseball cards or rare coins, and high-value items, like jewelry, precious metals, or intellectual property.
The other reason is your policy may simply not cover a rare item or collectible as if it were rare. For example, if you have a collection of rare Lego sets worth thousands of dollars, and it gets destroyed in a covered peril, the insurance company probably won’t be obligated to pay for the actual appreciated cost. You probably will, however, receive some new Lego sets in return, but they’ll probably be current models not comparable to the rarities you once owned.
One way to get around this is to purchase additional coverage, in the form of a rider (also known as an endorsement or floater), to your base renters insurance policy. You can specify that you want the replacement cost value of your collectibles or antiques, meaning they’re insured at the value they’ve appreciated to. This rider, called an “agreed value” option, might cost a lot, however, so make sure you talk it over with your insurer. When filing a claim under this provision, you’ll have to come to an agreement with the insurer about what the replacement cost value of the item would be, sometimes by using online marketplaces and expert opinions to decide.