Insurance Coverage and Actual Cash Value

After a disaster strikes, one of your first calls will be to the company that provides your homeowner's or renter's insurance. As you negotiate the claim, it's important to understand the difference between replacement value and actual cash value.

Calculating Actual Cash Value

Actual cash value (sometimes known as market value) is calculated by estimating the replacement value of an item, then subtracting the depreciation. Depreciation is the amount an item has lessened in value since it was purchased, taking into account age, wear and tear, market conditions and obsolescence.

Insurance agents use the formula replacement cost - depreciation = actual cash value or ACV.

For example, suppose you bought a refrigerator 3 years ago for $1,000. A similar, new fridge is still selling for $1,000 today, but after 3 years, your fridge is arguably worth less than $1,000. For argument's sake, let's say the fridge is now worth $700. If your insurance company reimbursed you for the actual cash value, you'd only receive $700 for your fridge, rather than the $1,000 it would cost to replace it today.

Replacement Cost Versus Actual Cash Value

As homeowner or renter, it's most desirable to get reimbursed for damaged or destroyed items using the replacement cost, because you'll get the cash necessary to buy new items. However, you'll have paid higher insurance premiums for replacement cost reimbursement.

Insurance companies, on the other hand, prefer to reimburse using actual cash value, because it saves them money. While you'll have paid lower premiums for ACV reimbursement, the trade-off is that, in the event a disaster strikes, you'll receive less money under actual cash value reimbursement and may have to pay more out-of-pocket costs.

Both ACV and replacement cost take into account the current cost of replacing an item. Imagine a flat-screen TV that you purchased when the technology was new. You paid $3,000, and the similar product is today selling for $2,000. The depreciation on your $3,000 model was $1,500. Using ACV, you would receive $500 ($2,000 replacement cost - $1,500 depreciation = $500 actual cash value) for a destroyed flat-screen TV. Using replacement cost, you'd receive $2,000.

In contrast, imagine the case of an item where the replacement cost of an item has increased. You paid $1,000 for a sofa last year. Today, that same sofa is selling for $1,500. Your $1,000 sofa has depreciated in value by $250. Using ACV, you would receive $1,250 ($1,500 replacement cost - $250 depreciation = $1,250 actual cash value). Using replacement cost, you'd receive $1,500.

In all instances, the insurance company is looking at the cost of replacing a damaged or destroyed item with one that is of similar quality and has similar features. So if your 36" flat-screen, high-definition, brand-name TV is destroyed, the insurance company will look at the price of similar 36" flat-screen, high-definition, brand-name TVs. They won't insist that you buy a 19" black-and-white model!

Questions for Your Attorney

If you feel that your insurance company is unfairly calculating the actual cash value of your home and possessions, then you should consider talking to an attorney who is experienced in handling insurance claims. He or she can help you maximize the value of your claim.

Among the questions to consider asking your attorney:

  • Have you previously handled cases similar to mine?
  • How is your fee calculated? Do you charge an hourly rate, flat fee or a percentage of the claim you receive for my case?
  • Looking at the adjuster's estimate, do you see places where I am owed additional money?
  • Am I entitled to replacement cost for my house and possessions?

Related Resources on Lawyers.comsm

- Insurance Coverage and Replacement Costs
- Dealing With Insurance Companies
- What is My Homeowner's or Renter's Insurance Claim Worth?
- Homeowner's and Renter's Insurance FAQ
- Find an Insurance Lawyer in your area
- Visit our Insurance Claims message board for more help

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