Insurance Damage Claim Terms: Actual Cost Value Versus Replacement Cost Value
Why is it important to know these two terms when filing an insurance claim for damages to your home? It is because these insurance damage claim terms usually appear on the property claim estimate sheet, and they do have different meanings.
Understanding the difference between Actual Cost Value (ACV) and Replacement Cost Value (RCV) is important because either of the two cost values will determine the amount you receive in compensation for a loss. The depreciation rate of your insured asset may also be a determining factor.
It is normal that homeowners are not well versed on exactly what their insurance policy covers, which is why a good damage restoration company, being experts in damage coverage, should interact with your insurance company on your behalf.
However, even though it is often complicated to understand, nonetheless, all homeowners should clearly understand whether your insurance policy offers Actual Cost Value Coverage, or Replacement Cost Value coverage.
Insurance companies may calculate the value of losses with different methods.
Subject to California Insurance Code Section 2071, the insurer is obliged to pay the expense of repairing, rebuilding or replacing the property destroyed or damaged with other materials of like kind and quality, wherein the measure of recovery is determined by the actual cash value of the damaged or destroyed property, as stated in California Insurance Code Section 2071.
So, let’s define these 2 terms so we can get a better understanding of what is important:
Replacement Cost Value Explained
Replacement cost value is equal to the exact cost of the item you have insured. That means that all the wear and tear will not be considered when calculating your compensation. This type of policy is considered favorable to most clients.
If your house is damaged and you have this policy, you will be compensated the amount it would cost you to replace the damaged items today.
Here’s an example scenario wherein RCV is part of your coverage:
Your home was damaged by flooding because of a broken pipe inside your home. After calling a water damage repair company to start your cleanup, your next step is to file a claim with your insurance, and replace the furnishings that were damaged.
One of the furnishings which was damaged was a sofa that you had purchased about a year ago for $1500. If you have Replacement Cost coverage as part of the policy, you can be paid for $1500 to $1600 just for the sofa because that is what it would cost to buy a similar sofa based on current market prices.
Actual Cost Value Explained
Under California law: ACV means the Fair Market Value(FMV). Fair Market Value is determined as the market data on sales of comparable property.
In cases where there is no relevant market, FMV may be determined by any method of valuation that is just and equitable. Specifically, alternatives to using market valuation approach is Replacement Cost less Depreciation.
The California law also establishes that if insurers want to determine ACV based on replacement cost less depreciation all they have to do is to say so on the policy- this can be accomplished by using words such as “Actual Cost Value with proper deduction for depreciation”.
So if you come across these terms it only means the insurance company shall compute using the depreciation method.
Here’s an example when the insurance policy you have covers ACV value only:
Let’s use the same scenario above with the sofa, and the insurance policy provides Actual Cost Value coverage. You may get paid $1200 for the sofa as opposed to the $1500 that you paid for it when you purchased it. This is because the insurance company would have to consider how long you have used the sofa which is about a year from the time it was purchased.
When insurance companies use this method to calculate your losses, they deduct depreciation. What ACV simply stands for is the current market value of your now used item or whatever you have insured.
The current market value is calculated by deducting an asset’s depreciation from its original value.
Depreciation is simply the wear and tear. Using depreciation is the preferable process to insurance companies. It is logical because they compensate you with exactly the cost of what you have currently, not what it was worth brand new years ago.
Insurance companies use sophisticated methods to determine a depreciation amount. They attempt to establish the useful lifespan of an item (for example a furnishing’s useful lifespan may be determined as 5-10 years) and then determine how much of that lifespan remains as a percentage.
You multiply that percentage by the replacement cost and you get the Actual Cost Value or ACV.
Let's use the sofa example above that you bought a year ago for $1500, and it is damaged or destroyed due to water. The useful lifespan of a sofa or furnishing is determined to be 5-10 years. The cost to replace the sofa with a brand new one (Replacement Cost Value) of like kind and quality today is $1600.
But, because the sofa that was damaged was already a year old, it only has 4 years left (using 5 years) of its useful lifespan. So the current Replacement Cost for the damaged sofa is $1600 and with 4 years of useful life left (80%), the Actual Cost Value would be calculated as $1,600 (RCV) x 80% (Percent of useful life left) = $1,280 (ACV).
This example can be useful in conceptualizing depreciation and it is very important to keep in mind that depreciation can be applied to building materials inside your home as well.
The difference between dollar amounts covered under Replacement Cost and Actual Cost can vary quite significantly, so it is therefore important to know which one your policy includes and make sure that you are comfortable with the amount of coverage you have.
As you might imagine, each type of coverage affects your premiums. Replacement Cost coverage is more expensive, as you are replacing old with new. You should speak with your adjuster to clarify which coverage is included in your policy before you begin any repair work.
Understanding your insurance coverage is vital. You can avoid dealing with stressful situations when filing claims and be guaranteed your loss will be covered appropriately if you know what these terms mean.
Here at Five Star Restoration we are not just a team to help you with restoration and repairs but we also provide helpful information to homeowners to make sure you have the knowledge you need to make informed decisions for your home and family.
Call us now at 951-368-2227 for fast help with your damages and no stress, affordable repair/restoration due to: Pipe leaks, appliance leaks, slab leaks, mold, flooding and much more. We are always available to answer your questions, and we are open 24/7.
Tags: Actual Cost Value, Replacement Cost Value, Water damage cleanup, water damage insurance coverage