Actual Cash Value vs. Replacement Cost

If you file a claim, how does your insurance company pay you for the loss? Does your homeowners policy cover you for actual cash value of the item reported, or for the replacement cost?

What’s the difference?

Let’s say that a fire takes out your favorite easy chair. There are two ways to calculate how much your insurance company will reimburse you when you report this loss. Standard renter’s policies cover the actual cash value of the property minus a deduction for physical deprecation and obsolescence. Your 10-year-old recliner might not be worth much when figured this way, and the payment from the insurance company might not be enough to buy you a new one. However, if you have replacement cost coverage (for an additional premium), the company will pay the lower of the two amounts below:

1. The cost to replace the property with a similar type and quality of property without a deduction for depreciation, or 2. The full cost to repair the item at the time of loss.

Many replacement cost polices have limits for goods such as jewelry and technology. To be sure you’re covered adequately, you might want to consider adding  a floater or rider to you policy.

Losing your $400 recliner in a fire and then convincing your wife you need to buy another with the $30 the collected from your actual cash value policy can be very expensive. Having replacement cost coverage to buy another one just like it can be priceless.