Insurance: Replacement Cost vs Actual Cost Value
As a homeowner, you probably purchased a home insurance policy because:
- You have a mortgage and the bank requires you to have insurance, and/or;
- You enjoy the peace of mind of knowing you won’t bear the bulk of the financial impact in the event of an insured loss to your property.
It can be tempting to simply purchase an insurance policy and forget about it until you need it. However, it is best to take the time to review and understand your policy coverage when you purchase it. You should know what is and isn’t covered and for how much, BEFORE you need to make a claim.
You should also be aware of how you will be compensated under your policy in the event of an insurance claim. While damages for certain insured items may be covered on a replacement cost value basis, it is more common to be compensated based on actual cost value.
What is the difference between replacement cost value and actual cost value?
Replacement Cost Value (RCV), as the term would suggest, means that you will receive compensation for the cost to replace damaged property with an item of like kind and quality. Policies that allow for Replacement Cost Value typically require the item in question to be replaced in order to receive the full value.
Actual Cost Value (ACV) is a form of compensation in which depreciation is taken into account. This means that compensation for damaged property would be granted based on its current market value, less depreciation for age, condition, life expectancy, etc.
How is this calculated in an insurance claim?
Let’s compare RCV and ACV coverage in the following example:
Your home has been broken into and your three year old, 42” flat screen TV has been stolen. The cost to buy another 42” flat screen TV by the same manufacturer is $300. Under an RCV policy, compensation would be: $300 + tax = $345 to replace the TV.
Under an ACV policy, depreciation would be considered at a predetermined rate. (For electronics, the current rate of depreciation is 10% per year). 10% x 3 years (age of the TV) = 30%. Calculated depreciation would be: $300 x 30% = $90. The resulting compensation would be: $300 – $90 = $210.00.
As you can see, there is a fairly significant difference in the way compensation is determined under the two types of coverage. If you are unclear on the type of coverage you have on various items under your policy, speak with your Agent or Broker for clarification.