Insurance Coverage and Actual Cash Value

Reviewed by David Goguen, J.D., University of San Francisco School of Law
No matter what kind of insurance you’re shopping for, knowing the difference between Actual Cash Value (ACV) and Replacement Cost can help you choose the right coverage.

You know you need homeowners insurance or car insurance, but when you meet with the insurance agent she starts throwing around terms like "ACV", "replacement cost", and "depreciation." In this article, we'll explain these terms, and why they're important when it's time to make a property damage claim under your coverage.

Replacement Cost Coverage

Replacement Cost coverage pays to replace the item you lost with the same or a similar item. If you know how much an item cost when you bought it, the insurance company will likely use this amount as the replacement cost.

For example, last year you purchased a new refrigerator for $1,200. You filed away the receipt of purchase along with the warranty. Last week you had a fire in the kitchen and the refrigerator was destroyed. You present the $1,200 receipt and warranty for your refrigerator to the insurance company, who in turn would pay you the replacement cost of $1,200.

But let’s be realistic, how many of us keep the receipt for each and every item we own? If you cannot show the insurance company how much you paid for the item when you bought it, the insurer is likely to pay you the Actual Cash Value of the item as a "placeholder" until you replace it with the same or a similar item and provide the insurance company with proof of the replacement cost. The insurance company will then pay you any difference between the Actual Cash Value and the Replacement Cost.

Actual Cash Value (ACV)

Actual Cash Value refers to the market value of the item at the time it is lost or stolen -- basically, what the identical item would fetch today on eBay or at an auction or sale. In practice, most insurance companies calculate the Actual Cash Value of an item by subtracting something called depreciation from the Replacement Cost.

There is usually no agreed-upon schedule or set standard for how much insurers can depreciate when it comes to your personal property damage claim, but the typical method for calculating depreciation is taking the “useful life” of an item and then using the remaining useful life of the item to determine depreciation. If that sounds like funny math to you, it often can be.

Here's an example. You buy a brand new smart TV for $1000. The insurer determines the useful life of the TV is five years. You’ve had the TV for two and half years when it is stolen, so there were 2.5 years of remaining life on the TV. Here, Depreciation = Useful Life (5 years) minus Time Owned (2.5 years), or 50%. So Actual Cash Value is calculated as: 1000 x 50%, or $500. So the insurer pays you $500 after depreciation, not the $1000 you paid for the TV.

So, What Do I Choose?

Although actual cash value (ACV) coverage is less expensive, for almost every homeowner, a replacement cost policy is your best bet because it will pay the true retail cost of replacing your home and possessions. Think about your new smart TV or laptop you bought a year or two ago. Actual Cash Value usually will not come close to replacing such an expensive item.

In our example above, a smart TV purchased for $1,000 two and a half years ago would actually be worth far less than that now. An insurer will likely write you a check for $500 or even less to cover the Actual Cash Value of the item. Finding another comparable television at that price would prove challenging, if not impossible. Most old electronics end up in the recycle bin and are rarely resold.

With replacement cost coverage, you may have to pay out of pocket for the difference between the Actual Cash Value and replacement cost initially, but your insurance company will usually reimburse the replacement cost you paid once you submit the receipts. In practical terms, if faced with multiple losses after a fire or storm, you will file a claim with your insurance company listing all of the damages. The insurance company will then write you a check for the Actual Cash Value of the items lost or damaged. You will use that money to replace the items a few at a time. When you purchase an item, you submit the receipt to the insurer, who will now issue a check for the amount above the Actual Cash Value needed to replace the item until all of your items have been replaced.

What About Jewelry and Other Valuables?

Although a replacement cost policy will cover all of the items in your home, most have a cap on certain items, usually $1000. When it comes to art, antiques or collectibles, the policy may cover even less, placing a cap on the entire collection much lower than it’s actual replacement cost value. Additionally, if you own rare items, their replacement cost may have increased significantly over time. The increase in value is called the appreciation value. Most insurers will not pay you the appreciation value, but the amount you initially paid to purchase the item.

For example, let's say you collect sports memorabilia for your favorite baseball team. You purchased a collection of baseball cards at a garage sale for $100. When you get the cards home you realize there are some rare cards in the collection. An appraiser informs you the cards are worth $2,500 and a few are so rare they would be almost impossible to replace. Depending upon your policy, the insurance company will likely only pay you the $100 you bought the cards for, or the cap in the policy of $1000, not the appreciation value of $2500.

You can purchase a special rider or endorsement that specifically covers your most valuable or irreplaceable possessions. You can also purchase a separate policy specially tailored to cover rare and valuable collections.

Get more tips on dealing with insurance companies and replacement costs.

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