Insurance terms can be confusing. Those terms can be frustrating when you are dealing with a claim. Understanding the definition of actual cash value and replacement cost is important. It is also helpful to grasp how those terms are applied in a claim situation.
Actual Cash Value
Actual Cash Value (ACV) is the replacement cost minus depreciation.
Example: The average lifespan of an LED TV is 5 to 7 years. If you have a covered loss the ACV would be calculated by taking the original purchase price, the age of the item and the expected life in years to calculate the ACV.
Purchase Price – $800.00
Current Age – 3 years
Expected Life – 7 years
$800.00/7 = $114.28, 7-3 = 4, 4 x $114.28 = $457.12
The ACV of the TV would be $457.12
Replacement Cost is the current amount that would be paid to replace an item to pre-loss condition with an item of like kind and quality. Like kind and quality takes into account that you may not be able to replace an item with an exact match. The replacement item should be of similar size and features.
Using the example above, if you have a covered loss and replace the TV with one of like kind and quality the replacement cost would be the amount in today’s dollars that would need to be paid to purchase that item.
Many policies have a provision to pay the replacement cost for the repairs to your home as well as the contents. Even with the provision for replacement cost some claims are settled at ACV.
Actual Cash Value Settlements
There are three major scenarios that will cause an ACV claim settlement.
- The policy that was purchased does not offer replacement cost coverage.
- The claimant chooses not to replace the item or repair the damage from the covered loss. The policy contains language that states the loss settlement will be paid at ACV until repairs are made or the item is replaced.
- ACV is paid as an initial claim payment. Once the repairs have been made or the damaged property is replaced the insured will receive a second payment. The second payment is referred to as recoverable depreciation.
Replacement Cost Settlements
Typically, you can expect a replacement cost settlement to be a two-step process. You will receive your initial ACV payment. Once the repairs are made or the damage property has been replaced the second payment will be made.
Specialty items should be discussed with your insurance agent prior to a loss. Items such as collectibles, antiques, fine arts and jewelry may require a separate policy for proper coverage.
Call us today with any coverage questions.