Differences Between Replacement Cost and Actual Cash Value Explained

Understanding Claims Payments for Actual Cash Value and Replacement Cost

woman trying to determine price of old items replacement value and actual cash value
How much money would you get paid if you had an insurance claim? Actual Cash Value and Replacement Cost Basis of Settlement Explained. JGI/Jamie Grill / Blend Images / GettyImages

Wondering how much money you might get paid for your insurance claim? A lot of people think that the limits in the DEC page of their insurance policy are a good indicator of how much they will be paid if they have a claim, but the reality is, the limits are the maximum they will be paid, and do not assure that that's really how much money you will get.

How Much Money Will You Get Paid in a Claim?

The answer to the question of how much money you can expect to get in your insurance claim depends on three key factors:

1. How Accurately You Can Describe, Document and Show the Lost Value of Your Property in Your Proof of Loss.

A home inventory of items can really help with this. The more details and proof you have of value, the less likely you are to be at the mercy of the insurance company's estimates. 

2. The Type of Policy You Have

Different insurance policies provide different coverages. Three people may all have a "homeowner policy" or a "condo policy" but the type of policy they have will dictate the risks covered, the exclusions and special limits for certain items. You can learn more about special limits of insurance here, the special limits on an insurance policy are not standard across all insurance companies since this is a point of differentiation for each insurance company. For example, companies specializing in attracting consumers with high-value homes may have higher special limits in the areas of Jewelry, fine arts, or even wine collections.

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3. The Basis of Claims Settlement: Actual Cash Value vs. Replacement Cost

This is where things get confusing, but we are going to clear the definitions up for you, as well as give examples.

The basis of claims settlement is in the small print in your insurance policy wording. Although the cover page or DEC Page of your insurance policy may list out the limits and the general basis of claims settlement, it's in the wording of how these coverages will be paid that things can get tricky.

Let's go over some basics to help you understand how the insurance company will determine the value of the items or personal property or contents you have lost, and how much you will get paid as a result in a claim. Very often when a person is disappointed in how much they get paid, it is because they did not understand how the basis of claims settlement worked and the real meaning of Actual Cash Value and Replacement Cost.

Actual Cash Value (ACV) Definition

Actual Cash Value is when an insurance company agrees to pay you the depreciated value at the time of the loss. ACV payments include a deduction for depreciation. Although it may sound interesting to hear you will get a cash value settlement, this type of settlement does not allow you to replace what you have lost, but rather only compensates you for the value of the item as if it was being sold at a garage sale.

The insurance company has more sophisticated ways of calculating the depreciation of items than just sticking garage sale sticker prices on them, but in any circumstance, actual cash value leaves you in a tough position because you will not be able to go out to a store and buy a similar item new.

Rebuilding your personal contents, or even worse, your home on an actual cash value or depreciated basis leaves you at a loss compared to replacement cost settlements.

Replacement cost policies are available in most cases, so always get a quote for a policy that will offer replacement cost before settling for ACV.

Replacement Cost Definition

Replacement Cost provides you with a payment equal to that required to replace lost items in the loss settlement of your claim.

Replacement cost is superior to ACV because it will allow you to put yourself in the same position you were in prior to the loss by providing you with the necessary money to replace your items.

One common misconception about replacement cost is how the replacement cost will be paid, in order to be able to collect replacement cost, you must replace the items. Read more below about how the replacement cost payment process will work.

When Will You Get the Payment for Your Insurance Claim Settlement?

Depending on the size of the loss and type of claim, you will likely have to provide a lot of information before receiving the full settlement for your claim.

Normally, once the adjuster has reviewed your list of loss items, decided what will be replaced or repaired, and assigned or approved the values, they will come to the depreciated value of the items, or actual cash value.

Expect to have to provide a list, have the insurance company review the list, and then you will have a chance to look at their offer before you are getting a payment. If your basis of loss settlement was actual cash value, then they may ask you to sign off on the amount, saying it is a final payment, before giving you the cheque. The process is different for replacement cost.

The Two Step Process of Replacement Cost Payment in a Claim

When you have a claim and the loss settlement is on a replacement cost basis, expect that you will have two cheques at least before getting fully compensated.

  • The first cheque will come for the actual cash value of the items.
  • Only once you prove you have replaced the items, will you receive final payments in most circumstances. This is a two-step process at least and puts the responsibility on you to actually replace the items before you can get paid for the full replacement cost. If items are replaced over time, you may submit your expenses along the way for the replacement and you can talk to your adjuster about when you can expect payments. This depends greatly on the size of the loss. 

Keeping open communication with the adjuster on your claim will help you understand exactly what to expect, and help you get paid for your actual loss

Can an Insurance Company Repair Items When You Have Replacement Cost Coverage?

The insurance company may have the right to repair or replace the items. They will review your list and let you know what they will be doing. If an item can be reasonably repaired or restored to its condition prior to the claim, then you may be offered a repair in those cases.

If the item can not be repaired, then they will offer you replacement cost. 

What Information May Be Required to Get the Replacement Cost in a Claim?

When expecting full compensation for the replacement of items or personal contents that were insured in your home, you should expect to provide a list of:

  • the item descriptions with makes and models if applicable
  • when you originally purchased it
  • the price you purchased it for
  • the replacement value today
  • any photos showing the condition of the item (if applicable or available)
  • the original receipt, if it makes sense

For example, you may not have the receipt for every pair of socks you owned, but you may have kept the receipt for your big screen TV or expensive sports equipment. Every insurance company has their own criteria, so be sure and ask the insurance adjuster for a form to help you fill out your proof of loss items list or a guideline of what they want. 

Is There Room for Negotiation on Replacement Cost Items?

There may be some room for negotiation on your list of replacement cost values. For example, if the item has been replaced by a better model, for example, you have a 3-year-old computer and it can not be replaced by the same make and model today, find an equivalent, and list that as the "replacement equivalent" with the associated value. Always try your best to find a similar replacement item.

There may be some negotiation back and forth on items like this, but if you give a fair replacement cost price and do your research, you will likely get what you are asking for.

If you do not do the extra work, the adjuster will come up with their best solutions or evaluations and you might lose out, or have to go back over the list and make revisions.

Some insurance companies are more lenient than others. This goes on a case by case basis, depending on the circumstances and the company's own requirements. 

What About Items That Are Obsolete?

If an item is determined obsolete, or by its "inherent nature cannot be replaced" you may find yourself in a situation where you will only be offered ACV, A similar clause may apply to sets or pairs when only one part of a set or pair is lost and the other is undamaged. 

Items That Can Not Be Replaced—How Does the Insurance Company Pay Out?

Specialty items that can not be replaced, for example, collections, antiques, and fine arts should always be discussed with your insurance representative before a claim occurs. This will allow you to get the proper advice about how to protect the value with the right type of insurance. It will also give you the opportunity to get appraisals, and possibly schedule the items on a floater or rider to ensure a settlement to value. If items of this nature are lost in a claim and the proper insurance was not obtained, you may be very disappointed in what you will get.

Does Replacement Cost Include By-Law or Ordinance Coverage?

Beware of the increased costs of reconstruction when it comes to By-Law coverage. Although your home may be insured for Replacement Cost, if there are by-laws that come into place after your original home was built, this may impact the actual cost of replacement by increasing costs due to new by-laws. There are exclusions in some wordings that do not include the increased cost of construction due to by-laws or city ordinances.

Endorsements are available to add by-law coverage to your policy, and some home more comprehensive high-end insurance policies will include by-law coverage, but if yours does not, this could be a major problem in the interpretation of what the actual cost of rebuilding will be, vs. the coverage in your replacement cost. 

Quick Fact: Two Out of Three Homes in America Are Underinsured​

Can You Get Replacement Cost If Your Building Was Under-Insured?

Insurance policies include clauses about when and how replacement cost will be paid on the structure or building. Many policies may include a Guaranteed Replacement Cost Clause as well. This clause allows for some wiggle room around the total insured value of the home when after a loss it is determined that the cost was a little off. The amount of wiggle room you have is based on your specific policy wording and type of policy form you have. 

For example, some policies may state that you will still be eligible for replacement cost if you were insured to at least 80 percent of the value of the actual reconstruction cost. Insurance companies may have different criteria, so be sure and check if you have a replacement cost clause, a guaranteed replacement clause and how things work if you are underinsured at the time of loss. 

Will the Insurance Company Ever Pay Out the Full Limit of My Insurance Policy in a Claim Without a Big List of Items?

In a disaster claim situation, where a home and its contents are a total loss, such as in a major disaster or fire, then some insurance companies may just pay out the full value to limit for the Home and Contents if the situation makes sense to them. This is never guaranteed and is at the discretion of the insurance company, they always have the right to ask for a proof of loss. However in major claims and total losses, if the insurance policy limits make sense, the insurance company may come to a settlement without making you list every single item up to your policy limits.

Ask your insurance representative how your insurance company generally settles a total loss to get an idea of how things would work. The best thing to do is always be prepared, with copies of larger purchased stored in a cloud, or safety deposit box off premises, as well as regularly document your home with photos that you could refer to in a total loss. 

Do You Have to Replace Your Home or Items to Get Replacement Cost Value Paid?

Yes, one of the aspects of the wording for replacement cost, as discussed above, is that you must replace in order to receive replacement cost payment, failing this, you may settle for Actual Cash Value. However there are exceptions in certain specialized policies, these are policies with the Replacement Value or Cash Out Options.

Replacement Value and Cash Out Loss Settlements vs. Replacement Cost

There are some high-end policies, usually for high valued homes that may offer you the option to receive full replacement value, without an obligation to replace. These types of policies are generally more expensive than standard insurance policies because they take into consideration more extensive coverages and greater flexibility during a claim. You can ask your insurance representative if you qualify for one of these types of policies, very often it is based on higher home values, or condo or tenant policies with higher contents limit requirements, along with other criteria. It is definitely a good option to look into because in a claim, the option to take a cash settlement with full replacement value can make things a lot easier in the face of a disaster and avoids the hassle of having to replace items in order to get their full value.

This is very different than Replacement Cost where if you choose not to replace the item, or rebuild your home, you may only be offered the depreciated ACV as a settlement option.