Difference Between Actual Cash Value & Replacement Cost


When you have an insurance policy, it is important to understand all of the verbiage in the policy as it applies to your coverage. If you do not know what a deductible is, then it is difficult to understand how a deductible affects your claim. Two of the more misunderstood terms in the world of insurance are “actual cash value” and “replacement cost.” These terms are often used interchangeably by homeowners, which could wind up being a costly mistake.

Actual Cash Value

The actual cash value (ACV) of an item is often determined by how much someone would pay for the item if they were not in a rush to buy it. In some cases, the ACV is established for the insurance industry by outside sources. For example, a car’s ACV is often determined by its Kelley Blue Book value. The item is depreciated throughout its life and that depreciation is used to establish the ACV. The ACV is meant to compensate you for a loss and not intended for you to be able to replace your item with a similar product.

Replacement Cost

The replacement cost of an item is the amount it would take to bring in an exact replacement of a lost item. With this kind of approach, the insurance company is prepared to pay what it would take to put you back in the position you were in before the loss.

Making Claims

Another significant difference between ACV and replacement cost is how these claims are paid. When you submit an ACV claim, you will be compensated rather quickly by the insurance company based on what they consider the ACV to be. In most cases, the insurance company will submit justification for the ACV they used to show how the figures were created.

With a replacement cost claim, you first have to actually replace your items and then submit those receipts to the insurance company. It is always recommended that you replace your items at a reasonable cost to avoid the possibility that the insurance company could reject any part of your claim.

Two Steps For Replacement Costs

A replacement cost claim is actually done in two parts. When you initially file your claim for the items you have lost, you will receive an ACV check from the insurance company. It is extremely important that you have information for all of your possessions to make your claim smoother. For example, your insurance company would prefer if you supplied the make, model, year, and any upgrades you made on your possessions for a more accurate claim.

You then have to prove that you actually replaced your items with valid receipts and any other paperwork your insurance company requires to get the remainder of your payment. It also helps if you have pictures on file with your insurance company to show the condition of your items.

Actual cash value and replacement cost are not the same thing. Homeowners will want to check their policies to find out which type of coverage they have and the process they must go through to get paid.