What is the difference between replacement cost and ACV?
No one want to go through the event of having to put forth a property claim, but luckily, thanks to your insurance you are able to receive compensation for your destroyed, damaged, or stolen property. Depending on your policy there are two ways that your insurer can calculate how much compensation you would receive, either replacement cost, or actual cash value (ACV). To determine what the difference is between the two, let’s examine what each term means. Then we can look at how to ensure you receive the fairest amount of compensation for your loss.
What is replacement cost?
“Replacement cost” refers to the cost of the property, as it was when you obtained it. Its purpose is intended to give you the compensation to replace the item with one that is of comparable make and quality, and to be used for the same purpose. For example, you cannot claim the loss on a stolen TV set, and then turn around and spend the compensated value on a dirt bike. With replacement cost, you must spend the compensation on a replacement TV.
What is actual cash value?
“Actual cash value”, or “ACV” is often referred to as “fair market value”. When you are compensated via ACV you are not compensated the amount you would have paid for originally, like with replacement costs, but rather the amount that the property is with at the time of the loss. Because you are not able to outright replace the lost property with the ACV compensation, you are not tied down with what you can spend the funds on.
How do they differ?
The difference between replacement cost and actual cash value the two comes down to depreciation. While replacement cost ensure that you get what you originally paid for your property, actual cash value relays on the item or property’s deprecation to determine its fair market value.
How to help ensure you get proper compensation
Read the fine print – The first step would be to read the fine print of your policy and determine what is covered with replacement cost or actual cash value. If you are still unsure after reading your policy, speak to your insurance broker so you fully understand how you will be compensated for your loss.
Keep a detailed inventory –It is a good idea to keep an inventory of all your insurable possessions in as much detail as possible. This will help your insurer to know what the value of your property is, and compensate your loses with more accuracy. It also helps to have records in the event of needing to negotiate a better compensation value.
Negotiate with your insurer– If your provider gives you a number based off of actual cash value which you feel is unfair, feel free to put on your negotiating pants and present a case for a higher value. Be sure to stay reasonable with your proposed counter numbers and have some receipts or other evidence to back up your reasoning. While it may or may not lead to more money for your lost or destroyed property, there is no harm is asking.