Actual Cash Value vs. Replacement Cost - What's the difference?
My oh my... a HUGE difference!
These little acronyms (ACV & RCV) make up for some heated claim situations. What do they even mean? Let me explain.
Agents must come up with a rough estimate for reconstructing their client's dwelling or building before submitting it to the insurance company for pricing and policy issuance. Depending on how thorough the agent is, the closer and more accurate the estimate for rebuilding will be. We (insurance companies, adjusters, and agents) use a software program called Marshall & Swift Boeckh or MSB program (Corelogic). It is a cost-estimating software that, when imputed with structure features including but not limited to the substructure to the roof covering, your specific location (which could estimate higher due to travel for a contractor, materials, etc.), the program then calculates with all overhead, architectural fees, engineering, labor, materials - today's cost to rebuild your structure. This does not include the contents within. Only items that are permanently installed. (That is another topic!)
Why did I mention this process? It's a critical and fundamental step to insuring a structure and for you to understand how ACV and RCV come into play.
ACV = Actual Cash Value or "Depreciated Value."
RCV = Replacement Cost Value or "Without Depreciation."
Your insurance policy will pay to replace or fix the structure. However, they WILL SUBTRACT money due to the age of the structure, wear and tear, etc. Why is it applied to policies? Some property features require it. It might not be favorable, insurable, aged, or poor repair, or the agent undervalues the property with the client's approval.
(Photo credit to Corelogic)
Your insurance policy will pay to fix or replace your structure but WILL NOT subtract money because of age, wear and tear, etc. This is the most common and desirable outcome with your property insurance. As long as the property is in good repair, within the appetite of the insurance company, and valued appropriately, underwriting has approved it to be insured; you will receive Replacement Cost Valuation. There are exceptions to this, but you could expect RCV in most cases.
The difference could be a large sum of money. Let's look at an example.
Your home's current replacement value today is set at $450,000. If you had a total loss, you could expect to be paid $449,000, assuming you had a $1000 deductible.
In the ACV scenario, a depreciation of -$169,186 is due to poor repair, or undervaluation by the agent/client, leaving you with only $279,814 (less the $1000 deductible) to rebuild your 4-bedroom home. In 2023, it would be very tight to build a 4-bedroom home for $279K.
The policy lists $450,000. However, it doesn't always mean $450,000. We joke about reading your policy when you can't sleep at night, but you should read your policy every morning with a cup of coffee. It's a great way to start the day! (In my humble opinion)
The basics of understanding those differences are essential to the property owner. Other policy features are taken into consideration during a loss, like co-insurance, endorsements, and exclusion, but for this post, we are simply giving an example of ACV vs. RCV.
Guess what? We didn't discuss Market Value!! That, my friend, is for another discussion. Please click here if you wish to read more about Market Value vs. other valuations.
ACV and RCV are solely focused on rebuilding the existing structure with or without depreciation. So, when you see ACV, pick up the phone, give your agent a call and have a chat. If it cannot be changed, at the very least, you will not have any surprises during a claim!
Thanks for reading!
Jessica J Weaver, CIC