Although the terms Actual Cash Value and Replacement Cost Value are not commonly used outside of property insurance disputes, they can have a substantial effect on the amount of money you receive from your insurance company after a loss.
After your insurance company determines that your insurance policy provides coverage for your loss, the insurance company has various ways to calculate the value it will pay you for your lost or damaged property. There are two main methods by which the insurance company calculates the value of your damaged property – Actual Cash Value and Replacement Cost Value – both of which will be discussed in detail below.
Actual Cash Value
Actual Cash Value (“ACV”) represents the actual dollar value of the damaged item in its depreciated, but not damaged, condition. Replacement Cost Value (“RCV”) represents the cost to actually rebuild or replace the damaged item with a new one. For example, let’s say your five year old 55” television was destroyed by a covered cause of loss. Since television prices are constantly dropping, the television you paid $1,000.00 for five years ago may now have a present “actual cash value” of only $200.00, which represents what you could actually sell a five year old television for today.
Replacement Cash Value
On the other hand, let’s say the cost today to replace your damaged television with a brand new 55” television is $800.00 – which would represent the Replacement Cost Value of the television. Replacement cost insurance is designed to cover the difference between what property is actually worth and what it would cost to rebuild or repair that property. In essence, it is insurance to protect the depreciation of the insured property.
Under current law, most insurance policies provide that the insurance company only has to initially pay the value of the damage on an Actual Cash basis. Later, after the insured has completed the repairs or replaced the damaged item, the insurer then has the obligation to pay the additional amount of money necessary to bring the payments up to the Replacement Cost Value of the loss.
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It is important to note that the replacement or repair of the damaged property must actually occur, otherwise the insurer has no obligation to provide the additional replacement cost reimbursement under the policy. If the policyholder fails to make the repairs or replace the damaged property, the insurer is only required to pay the actual cash value of the loss. Similarly, if the policyholder performs the full extent of the repairs for less than the amount of the initial Actual Cash Value payment, the policyholder is not entitled to then seek additional Replacement Cost Value funds (as the initial ACV payment was sufficient to fully repair/replace the item).
Lastly (and perhaps most importantly), the insurance company does not have the unbridled right to determine the Actual Cash Value of your damages – or the Replacement Cost Value, for that matter. As a policyholder, you have the right to question the insurance company’s damage payment and to determine whether such payment is sufficient to fully compensate you for your loss. Should you have any questions whatsoever with regard to your insurance claim, contact our office and we would be happy to discuss your claim with you.