When insuring a house, or possessions there are two main ways that these items can be valued for insurance purposes: they are Replacement Cost and Actual Cash Value. Both of these Loss Settlement Bases have their own advantages and disadvantages.

Replacement Cost is dollar value that it would take to replace an item, brand new, with another item exactly the same, or one of like material and quality. Replacement cost does not take depreciation into account.  For example, if you had a covered total loss to a shed, Replacement Cost would pay to rebuild that shed to a like quality of construction with similar materials at today’s construction prices. If the loss was partial, the coverage will make any necessary repairs to make the shed whole again.  Neither example would include a deduction for depreciation.

Actual Cash Value (ACV) is less expensive AND if chosen, permits the purchase of a lower limit of insurance (the ACV rather than the Replacement Cost). 

A Replacement cost loss settlement basis is a bit more expensive than Actual Cash Value and requires an insurance limit at the replacement cost of that building or item(s), but it ensures that you will have your item replaced with a new duplicate, or an item of similar quality and/or construction.

Replacement Cost, less a deduction for depreciation, equals the Actual Cash Value of that item.  Depreciation decreases the value of an item based on its condition and age.

Since ACV tends to be less expensive (rates per $100 of insurance are a bit lower) than Replacement Cost, it might entice a buyer, but an insurance buyer should always be reminded that with ACV as a loss settlement basis, the buyer may receive insurance proceeds and STILL not be able to afford to replace that item with a new one at today’s prices (or rebuild his home or building).

A quick comparison of Replacement cost versus Actual Cash Value:  Say, you bought a computer in 2007 for $1,500.  It was destroyed when a lightening strike caused a surge rendering the computer no longer operational.  If the computer were covered at ACV you would receive, for instance, $150, the amount of money it would cost you to go buy the same age and condition computer today.  (Or, the RC of the same kind of computer new today would be stated, then a deduction for depreciation would be taken and a check for the difference would be written.  Either way, the settlement would be low).

If however, the computer were covered at RC, you would insure it for what it would take to buy the same kind/quality new today and then at the time of the loss, you would receive the amount it would cost you to buy a new, similar computer.  Since the price of that style computer has probably decreased in this case, you would receive, say $700.  As long as the amount you chose when you bought the policy was $700 or more, you will be a happy consumer. 

As you can see there can be a large difference in the settlement amount, depending on which method of loss valuation you choose ahead of time.

When choosing which type of coverage to carry, you need to consider the following:
1. Does the item need to be replaced?
2. Do you have the financial ability to pay to replace the item if you do not get the full value to replace or rebuild that item from the insurance company?
3. How much is the difference in premium between Replacement Cost and Actual Cash Value?

The truth is that today, insurance companies have reduced the cost of RC to the point where it motivates the buyer in most cases to not even consider ACV. There is little doubt that RC provides the most positive claims experience, so unless cost becomes the obstacle, RC is the preferred way to go.

Note:  Please keep in mind that deductibles were not part of this discussion and will apply during a claim situation.

Whitaker-Myers Insurance Agency Inc. | 3524 Commerce Parkway, Wooster, OH    44691 | (330) 345-5000

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