Actual Cash Value vs. Replacement Cost When Filing A Homeowners Insurance Claim

At times homeowners may not understand some terms such as “actual cash value” or “replacement cost” and how it can affect their homeowners insurance claim. Many people think that the limits included in their Insurance Declaration Page (DEC) are the best indicator of how much they may get paid in a homeowners claim, but that’s not always the case. These limits are the maximum that could be paid, and not necessarily how much you will get paid. The following information will give you an idea of how much you should expect to get paid in a claim, and how actual cash value and replacement cost work.

How much you can expect to get paid?

How much you will get paid on your insurance claim is based on several factors:

  • How the value of your property is described and documented. Make sure you keep an inventory of all items with significant details. The more details you include, the more it will help you when filing your claim. You don’t want to be at the mercy of your insurance company’s estimates.
  • The type of policy you have. This may vary from insurer to insurer. Whether you have a condo policy or homeowners policy, the type of policy you take dictates the risks that will be covered by your insurance company. Some exclusions and special limits may apply, which aren’t standard across all insurers.  Policies focusing on value homes will have higher special limits in items such as wine collections, fine art, and jewelry.
  • The basics of claims settlement. In other words, is the insurance company going to pay “replacement cost” or “actual cash value.” This is the small print of the policy nobody likes to read. A homeowner may be disappointed by how much he or she is paid due to a lack of understanding of basic insurance claim terminology.

Actual Cash Value (ACV)

The actual cash value is the depreciated value of an item at the time the loss took place. This type of settlement doesn’t let you replace what’s lost, but rather it provides compensation for the value of the item at the price someone would purchase it in a garage sale. It’s a tough position to be in since it may be difficult to purchase a similar item with the compensation you receive. Replacing your personal belongings or even your property on an actual cash value or devalued basis leaves you at a loss when compared to replacement cost settlements.

Replacement Cost

This is the best approach as it can provide you with a payment equal to the amount that it will be required to replace the items you lost. In other words, when faced with a type of scenario where you lose valuable items, you will have enough funds to replace them, and put yourself in the same position you were before your loss.   

Replacement cost, however, requires that you replace the items first prior to collecting a full settlement. Some exemptions such as in “high-value home policies” may be different. Based on the type of loss you have experienced, you will be required to provide a list, which your insurer will review to determine how and what they will pay you. You should allow them time to review the list, and then also take some time to review the offer. Once you sign off the amount and agree to the final payment, you will receive a check.

There may be some room for negotiation. Some insurance companies are more flexible than others. Speak to a licensed agent today and learn your options.  




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