Actual Cash Value (ACV) vs. Replacement Cost (RC)

17 March 2014

RC is the amount it would cost to replace an item that was damaged or stolen. In contrast, ACV subtracts depreciation of that item due to age, wear and tear.

Consider this example. Let’s say your neighbors purchased new dining room furniture when they remodeled 10 years ago. They spent $5,000 for a dining room table, eight chairs and buffet on sale. After 10 years of family dinners and celebrations, the furniture did not have the shine it used to but it was still sturdy and in good condition.

Last month when celebrating Aunt Martha’s 75th birthday, your neighbor’s Bananas Foster finale turned into a disaster! The drapes next to the buffet caught on fire, which quickly spread to the tablecloth. Thankfully no one was injured and the fire was extinguished before it spread to another room. However, the dining room furniture was damaged beyond repair.

How much did your neighbors receive from their insurance company to replace their dining room furniture? Well, that depends on whether the policy paid ACV or RC. If they had ACV depreciation would most likely be calculated as the original cost of the item divided by the item’s useful life. The end result would be something like $2,000 — much less than the original purchase amount and considerably less than needed to buy a new set of comparable quality. If the policy covered RC, the valuation would reimburse your neighbors the cost to purchase a similar set at today’s prices, without having to wait for a sale!

That’s a quick example of ACV vs. RC and its impact on a claims payment. Besides this issue of property valuation, other endorsements and coverage options are available to best meet your individual needs. To help ensure that you have the necessary coverage, we recommend that you review your policy with your insurance agent annually, or even sooner if your situation changes.