When it comes to insurance claims, you may hear the terms Replacement Cost and Actual Cash Value, but what does that mean? Homeowners insurance policies can either pay for replacement cost or actual cash value, but wouldn’t it be nice to know which one you’re getting coverage for? That’s what we are here for! To break it down for you and let you know how to find out what’s covered in your policy.
What is the Difference Between Replacement Cost and Actual Cash Value (ACV)?
Generally, Replacement Cost is the cash amount needed to repair or replace your home using the same materials and quality but paying for those materials using today's market value. The Actual Cash Value is generally the Replacement Cost minus the home's depreciation or decrease in value.
How Does Replacement Cost Value and Actual Cash Value Pay Out When You File a Claim?
Before we dive right in, it’s important to note that each insurance company has their own procedures and policy terms can vary. You should always read the terms of your homeowners insurance policy. Also, if you have a home loan, your lender may have certain procedures that determine how the insurer pays a claim since the home is collateral for the loan that is made to you. These procedures can usually be found in your loan documents or mortgage.
When a valid claim is filed under a Replacement Cost insurance policy, typically, the insurance company will pay out the Actual Cash Value to begin the repair/replacement, which is the estimated Replacement Cost minus a deduction for depreciation. Once the repair/replacement is complete, the customer will need to submit documentation showing the amount paid to repair or replace the damage. Once this has been reviewed, the insurance company will pay the remainder up to the Replacement Cost subject to policy limits. Keep in mind you may have a deductible for the claim that is not reimbursable.
When a valid claim is filed under an Actual Cash Value policy, typically, the insurance company will pay out the value amount of the repair/replacement (companies may use different tools to determine the value) minus both depreciation and the deductible. If the repair/replacement costs are more than the amount paid, the difference will not be compensated for.
How Do I Find Out the Actual Cash Value of My Home?
To get an estimate of what your mobile, manufactured or modular home's current value is, you can purchase a value report from NADA. To get an estimate of the value of your mobile home or site-built home, you may want to consider hiring an appraiser to do an appraisal.
Now that you know the difference between replacement cost and actual cash value when it comes to homeowners insurance policies, take a look at your homeowners insurance policy terms to see whether it covers your property for the replacement cost or actual cash value. If you find that your policy doesn’t feature the coverage you wish you had, give us a call at 1-800-664-9309 and let HomeFirst® Insurance Agency help you find the policy that best fits your needs!