Archive for the ‘Homeowner Insurance Coverage’ Category

Insurance Policies: ACV vs RCV

Friday, April 29th, 2011

There are two methods of compensating you to bring you to a “pre-loss condition.”  One is to pay you Replacement Cost Value (RCV) and the second is to pay you Actual Cash Value (ACV). What’s the difference between the two? Depreciation.


Payment based on the replacement cost of damaged or stolen property is usually the most favorable figure from your point of view, because it compensates you for the actual cost of replacing property. If your camera is stolen, a replacement cost policy will reimburse you the full cost of replacing it with a new camera of like kind. The insurer will not take into consideration the fact that you ran three rolls of film through the camera every day for the last two years, causing a considerable amount of wear and tear.


In contrast, actual cash value (ACV), also known as market value, is the standard that insurance companies arguably prefer when reimbursing policyholders for their losses. Actual cash value is equal to the replacement cost minus any depreciation (ACV = replacement cost – depreciation). It represents the dollar amount you could expect to receive for the item if you sold it in the marketplace. The insurance company determines the depreciation based on a combination of objective criteria (using a formula that takes into account the category and age of the property) and subjective assessment (the insurance adjuster’s visual observations of the property or a photograph of it). In the case of the stolen camera, the insurance company would deduct from its replacement cost an amount for all the wear and tear it endured prior to the time it was stolen.

When your adjuster comes out to settle your claim, they will prepare an estimate of damages, then deduct your deductible and deduct the value of depreciation. Depreciation value is often determined by the Property Loss Research Bureau – a third party organization that performs all research related to insurance claims and loss. Typically insurance companies follow their standards.

Here’s where the important part comes in. If you have an ACV policy, you get your check and that’s it. Once depreciation is deducted and you get the actual cash value, the claim is settled. You have to come up with the actual amount to do repairs on the property and replace contents. However, if you have an RCV policy – you’re in a much stronger position. In an RCV policy, you typically get your actual cash value check when the adjuster first comes out….then you get another check that covers the difference between ACV and RCV after your contractor completes repairs on the property.

No Code Upgrade Policies

Some policies will provide either ACV or RCV coverage, but exclude items that are 1) not already existing and 2) required under current building codes. For example, ice and water and drip edge are required in some municipalities in the state of Colorado. However, if these items are not currently on the roof and the homeowner has a “no code upgrade policy,” the homeowner is responsible for these costs.


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