Actual cash value vs. Replacement cost homeowners insurance
Let’s face it- unless you’re in insurance, you probably don’t spend too much time reading about insurance, let alone diving into terms like Replacement Cost and Actual Cash Value (also shortened to ACV). So if you don’t know what the terms mean, then it’s pretty much impossible to know the difference BETWEEN the two terms. But if you’re a homeowner, it’s CRITICAL you know what these terms mean and the differences between the two, so you’re not surprised or unhappy at claim time.
So if you don’t want to be surprised by an Ohio homeowners insurance claim settlement, take a few minutes and read on. A basic understanding of these terms will help eliminate 99% of most claims problems and arguments. Two claims examples are also provided to help you better understand the difference.
What is Replacement Cost?
Replacement cost is the cost to repair or rebuild at today’s prices.
What is Actual Cash Value?
Actual cash value is Replacement cost MINUS depreciation for age and wear & tear. Read on for two examples that illustrate these definitions in action.
Actual cash value vs. Replacement Cost Claims Example #1
A storm rolls through your area and the high winds tear off your roof.
Here’s a simplified version of how this claim would be settled under Replacement Cost.
A new roof costs $10,000. Your deductible is $1,000. The insurance company would write a check for $9,000, which is the cost of the roof minus your deductible.
Actual Cash Value vs. Replacement Cost Claims Example #2
Let’s stick with the roof example, BUT talk about how it would be settled under Actual Cash Value.
We know the roof costs $10,000. Depending on the age of the roof, the insurance company will depreciate the claim. Keep reading for that example.
Bill to replace the roof: $10,000
Depreciation due to age: -$3,000 (30% depreciation as an example)
_______
$7,000 payable
-$1,000 deductible
______
$6,000 paid by insurance
As you can see by the above examples, with a replacement cost loss settlement you will receive more for your claim, in this case, $3,000 more.
So how do I know which to choose- actual cash value vs. replacement cost?
If you own your home, the chances are REALLY good that you want to insure your house at replacement cost. That makes sense right? If something happens to your primary residence, you would want it rebuilt like it is or repaired to look like it did before the claim. Perhaps you’d want a few minor modifications, but you’d definitely want “your house” back again, like it was before (which is, incidentally, the purpose of homeowners insurance).
For this reason, replacement cost is the default for Ohio homeowners insurance. It adds up to peace of mind for you and provides a much better loss settlement. Again, when you suffer a tragedy like a loss to your home, the last thing you want to get is a check for only a portion of your damages. You have enough stress at that time- you don’t need more. You want to get back on your feet as quickly as possible.
However, in some circumstances, a home may have some issues that PREVENT replacement cost (mostly underwriting situations like a home that doesn’t have electrical, heating, plumbing or roof updates or has additional maintenance requirements). So perhaps the homeowners insurance policy is written at ACV for the house, with the provision that when the required updates are completed, then it will be edited to replacement cost.
