Replacement Cost vs. Actual Cash value on Your Home Insurance Policy
Do you ever wonder how much you will get paid by your insurance company in the event you have to submit a claim for damage to your property? Often times people think the limits shown on their declaration page are a good indicator of how much the will be paid, but the reality is those limits indicate the maximum amount they could get paid. Also, they type of coverage will largely determine the amount of money the insurance company is going to pay to fix your damage.
The Basis of Claims Settlement: Actual Cash Value vs. Replacement Cost
This is where things get confusing, but we are going to clear the definitions up for you, as well as give examples.
The basis of claims settlement is in the small print in your insurance policy wording. Although the cover page or DEC page of your insurance policy may list out the limits and the general basis of claims settlement, it's in the wording of how these coverages will be paid that things can get tricky.
Let's go over some basics to help you understand how the insurance company will determine the value of the items or personal property or contents you have lost, and how much you will get paid as a result in a claim. Very often when a person is disappointed in how much they get paid, it is because they did not understand how the basis of claims settlement worked and the real meaning of Actual Cash Value and Replacement Cost.
Actual Cash Value (ACV)
Actual Cash Value is when an insurance company agrees to pay you the depreciated value at the time of the loss. ACV payments include a deduction for depreciation. Although it may sound interesting to hear you will get a cash value settlement, this type of settlement does not allow you to replace what you have lost, but rather only compensates you for the value of the item as if it was being sold at a garage sale.
The insurance company has more sophisticated ways of calculating the depreciation of items than just sticking garage sale sticker prices on them, but in any circumstance, actual cash value leaves you in a tough position because you will not be able to go out to a store and buy a similar item new.
Rebuilding your personal contents, or even worse, your home on an actual cash value or depreciated basis leaves you at a loss compared to replacement cost settlements.
Replacement Cost (RC)
Replacement Cost provides you with a payment equal to that required to replace lost items in the loss settlement of your claim.
Replacement cost is superior to ACV because it will allow you to put yourself in the same position you were in prior to the loss by providing you with the necessary money to replace your items.
One common misconception about replacement cost is how the replacement cost will be paid, in order to be able to collect replacement cost, you must replace the items. Read more below about how the replacement cost payment process will work.
Can an Insurance Company Repair Items When You Have Replacement Cost Coverage?
The insurance company may have the right to repair or replace the items. They will review your list and let you know what they will be doing. If an item can be reasonably repaired or restored to its condition prior to the claim, then you may be offered a repair in those cases.
If the item cannot be repaired, then they will offer you replacement cost.
Is There Room for Negotiation on Replacement Cost Items?
There may be some room for negotiation on your list of replacement cost values. For example, if the item has been replaced by a better model, for example, you have a 3-year-old computer and it cannot be replaced by the same make and model today, find an equivalent, and list that as the "replacement equivalent" with the associated value. Always try your best to find a similar replacement item.
There may be some negotiation back and forth on items like this, but if you give a fair replacement cost price and do your research, you will likely get what you are asking for.
If you do not do the extra work, the adjuster will come up with their best solutions or evaluations and you might lose out, or have to go back over the list and make revisions.
Some insurance companies are more lenient than others. This goes on a case by case basis, depending on the circumstances and the company's own requirements.
Will the Insurance Company Ever Pay Out the Full Limit of My Insurance Policy in a Claim Without a Big List of Items?
In a disaster claim situation, where a home and its contents are a total loss, such as in a major disaster or fire, then some insurance companies may just pay out the full value to limit for the Home and Contents if the situation makes sense to them. This is never guaranteed and is at the discretion of the insurance company, they always have the right to ask for a proof of loss. However in major claims and total losses, if the insurance policy limits make sense, the insurance company may come to a settlement without making you list every single item up to your policy limits.
Ask your insurance representative how your insurance company generally settles a total loss to get an idea of how things would work. The best thing to do is always be prepared, with copies of larger purchased stored in a cloud, or safety deposit box off premises, as well as regularly document your home with photos that you could refer to in a total loss.
Do You Have to Replace Your Home or Items to Get Replacement Cost Value Paid?
Yes, one of the aspects of the wording for replacement cost, as discussed above, is that you must replace in order to receive replacement cost payment, failing this, you may settle for Actual Cash Value. However there are exceptions in certain specialized policies, these are policies with the Replacement Value or Cash out Options.
A home inventory of items can really help with this. The more details and proof you have of value, the less likely you are to be at the mercy of the insurance company's estimates.