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Replacement Cost vs. Actual Cash Value

RC vs ACVYou’ve probably heard the terms “replacement cost” and “actual cash value” at some point when discussing your insurance with your agent. Chances are you probably heard a bunch of terms while reviewing your coverage and wondered what does it all mean?   For today we are going to focus on these terms and how they relate to your coverage.

Actual Cash Value or “ACV” as it’s known in the industry is exactly what it sounds like… what the item is worth right now.  Insurers look at the initial cost of the item and then subtract depreciation for the number of years you had the item.  The depreciation applied can vary depending on the quality of the item, its current condition, age,  and what the life expectancy of the item is.

Replacement Cost means the amount of money it would take to replace damaged item with a new one of comparable material and quality used for the same purpose.  When shopping for insurance this is the coverage you ideally want to look for.  This coverage will get you closest to the living situation you had prior to the covered loss occurring.

When you suffer a claim the adjuster is going to request that you provide them with a full list of details including:

  • Description of the item(s) with make and model where applicable
  • Purchase date
  • Purchase price
  • Current replacement value
  • Receipt if available
  • Photos if available

Realistically you probably don’t keep the receipt for every item you have in your home. Even if you do there is a chance those receipts may have been lost in the claim.   So what can you do?  Well, keeping a photo log of the rooms in your home is a good start.  It will help the adjuster understand what items were in your home, and it also will help jog your memory as well.  Mike from our office has been through a fire and he can vouch for how hard it is to remember everything you had after a total loss.   Our smartphone app offers our clients the ability to store these photos in our office as part of their file.  That way the photos won’t also be lost in the claim and will help to expedite the claims process.

If your settlement is on Replacement Cost basis you can expect to receive two cheques from the insurance company.   The first cheque will be for the Actual Cash Value of the items that were damaged.  After you provide your adjuster with receipts for the replacement items you will be issued a second cheque for the difference between the Actual Cash Value and Replacement Cost.  This ensures you get Replacement Cost value for the items you do replace and the Actual Cash Value for the items you choose not to replace.

Some items just can’t be replaced. If the item is deemed obsolete or by inherent nature cannot be replaced, you may only be offered an Actual Cash Value settlement.   If you own items that are unique, or one of a kind, we encourage you to reach out to your agent to discuss if there are any additional coverage options available to you for these items. Some of these items may be insurable on a special floater where the items value is agreed on in advance of a loss occurring.

Actual Cash Value and Replacement Cost coverage are also used on  auto insurance policies. Here is an example of how it works on an automobile policy:

12 months after purchasing a brand new car for $40,000 you get in an accident. The damage is beyond repair and the vehicle is written off.

With Replacement Cost Coverage: Some insurers offer optional replacement cost coverage or a waiver of depreciation on brand new cars. With one of these endorsements on your policy you’d be able to replace your vehicle with a new version of the same model (or comparable one) or you could receive a cheque for the amount you originally paid for it.

With Actual Cash Value Coverage: Without one of these endorsements the settlement would be based on actual cash value. The insurer would look at what the market value of a vehicle of like kind and quality, in the same condition as yours was immediately prior to the loss occurring.   In a case like this, your settlement would likely be around $30,000 instead of your original purchase price of $40,000.

So there you have it. If you still have questions, or are concerned about your own policy coverages, please contact us.

 

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