“Replacement cost” and “actual cash value” are two of the most common calculations insurers use to determine the amount a customer will receive if they make a home or car insurance claim. In other words, you could either be reimbursed for the cost to replace the lost or damaged item or its actual cash value, depending on what it says in your policy. So, what’s the difference? And how do these calculations really apply when you make a claim? Let’s have a look.
If your policy says it will cover the replacement cost of an item that is lost or damaged, the dollar amount you’ll be paid is equal to the cost you’d need to replace that item with a new, similar product of like kind and quality. Since insurance is designed to get you back to the same position you were in just before a loss, your insurer will do some research and determine how much it would cost to replace the item with a new one that is as comparable as possible — no more, no less.
Actual cash value
If your policy is set up to cover the actual cash value of an item that is lost or damaged, the dollar amount you’ll be paid is equal to how much the item is worth today. This considers the original price you paid for the item, but it also considers depreciation (the natural decrease in an item’s value over time, usually due to wear and tear) and the physical condition the item was in on the day of the loss. Most insurance companies will use standard guidelines (known as “depreciation tables” in the insurance world) to determine an item’s actual cash value — or they’ll contact a professional retailer or appraiser to determine what a similar used item would cost to buy.
The premium you pay when you have an actual cash value policy may be lower since the reimbursement you’d receive in the event of a claim is generally much less than you’d receive with a replacement cost policy.
How do replacement cost and actual cash value work in real life?
Keep in mind that these examples are intended to give you a basic understanding of how actual cash value and replacement cost work. If you have specific questions about your policy, please talk to your licensed insurance broker.
Picture this: A pipe in your basement springs a leak and damages the sewing machine you purchased 30 years ago for $500. After consulting a professional sewing machine technician, your insurer informs you that the machine is damaged beyond repair. So, how much will you be reimbursed?
Picture this: A rear-end collision on your way home from work lands your two-year-old SUV in the shop. After receiving an estimate for the repairs, your insurer decides your vehicle isn’t worth repairing. How much will you be reimbursed?
Blog information provided by Economical Insurance