Understanding your policy:

Actual cash value vs. replacement cost

All insurance policies include a basis of settlement section, which is if the insurer will “actual cash value” or “replacement cost” for the items lost in an event. The difference between the two could be a serious swing in coverage payouts in the event of a claim.

Actual cash value is the value of an item of property at the time of loss after calculating depreciation. Essentially, this is the value of the item in its most recent condition, not the full cost of replacing it. One way to think of actual cash value is “garage sale pricing”. For example, if one of your old, large table saws were stolen out of your shop, actual cash value would pay the depreciative value for the item, not how much it would cost to purchase a new saw. This means you will more than likely have to come out-of-pocket for the difference in cost to replace it.

The other option is replacement cost, which provides the amount to replace the item. This is an important distinction, especially if the items you are insuring are critical to your business and come with a high replacement cost. One thing to keep in mind with replacement cost settlements is that many policies will require you to replace the item yourself, then submit it for payment. The terms could be different for your policy, so be sure to check with your agent first before assuming your coverage options.

Getting the most for your personal property

Regardless of coverage, we recommend that you keep a thorough list of all items and their values. Having a complete list – including a description, cost, quantity, and a photo – will help maximize your payment for items lost in a claim. This doesn’t mean you need to have it on everything, but any high-value tools, equipment, or gear should be on your list.

Recently Stephen Harrington, the Cross Insurance Agency Chief Operations Officer, and highly experienced insurance agent, explained the difference in actual cash value and replacement cost coverage. In this video, Stephen also gives some real-world examples. Give the video a watch or click to jump to the video transcript.

We are here to help you understand your policy

Figuring all this out on your own is tricky, which is why we want to help. Coverage options, processes, and payments differ not just from insurance carrier to carrier, but also policy to policy. An insurance policy for contractors will be different for farmers, which will be different for truckers. Fortunately, we have experts in all the above to help you through your options. Give us a call! Below you will find our commercial insurance team, along with their specialties.

Eloise Patton
Contractors & small businesses
253-475-5313 x 100
eloise@crossinsuranceagency.com

Elliot Cox
Contractors & small businesses
360-438-6708 x 140
elliot@crossinsuranceagency.com

Abby Johnson, CISR
Trucking & Transportation Specialist
360-993-4780 x 111
abby@crossinsuranceagency.com

Stephanie Seeds
Farm Insurance Specialist
360-659-3970 x 123
stephanie@crossinsuranceagency.com

Transcript

This transcript has been created using speech-to-text automation and a human review. It has been lightly edited for clarity, though some errors may still exist.

The difference between actual cash value normally comes up in policies where a home is maybe a little older, or it’s an investment property where they’re not worried about the true value of the home. So they’re worried that if the home burns down, they’ll be able to rebuild something, not exactly what was there. It’s normally used for vacant properties. It’s for properties that are maybe in not the best condition or have a lot of wear and tear already, and they know that if something was to happen, they just want some of their money back, they’re not going to rebuild to the same style and quality.

Actual cash value for property like personal property or business property, less expensive normally for actual cash value, but what that’s doing is if you have a couch that was $3,000 and it’s 10 years old, it’s really past its life expectancy, so actual cash value would pay what the value of the couch was in its current condition or with the remaining life expectancy left. So basically, we look at garage sale or like thrift store pricing.

The replacement cost would say, hey, you had a gorgeous sofa from XYZ furniture. Yes, it was 10 years old, but we’re gonna replace it with another couch from XYZ furniture, so it’s gonna be a similar quality item. Where we sometimes get into a pickle is with like, computers and televisions. Like we have a 50-inch TV, it was top-of-the-line five years ago, something happens, TV’s destroyed in a fire. They’re gonna look at the style and quality of the TV from that time, and that’s what they’re gonna replace it with. It’s not gonna be better than you already have. So sometimes, even with replacement cost, you’re out a little bit, but what is a five-year-old TV worth for garage sale or thrift store price? It has almost no value. So what could you go buy the same quality and type of item for today?

In building, what replacement cost is really nice for is if there’s a small kitchen fire and some cabinets are damaged, and the countertop is damaged, it literally pays for brand-new cabinets, countertop, new stove, or whatever was damaged in the fire. Actual cash value would go, oh, your cabinets are 25 years old, they really only have an expectancy of 30, we’re gonna take the cost to replace and depreciate it by the amount of time you’ve had them and the expectancy that’s left. Most homeowners policies come out; most standard, preferred, basic homeowners policies come out with replacement costs for the home, and we endorse, most of the time, the replacement costs for the contents because it’s a decision the consumer needs to make.

Business policies and rental property policies for tenant-occupied properties normally come out as actual cash value, and you have to endorse it to replace the cost. Most carriers now, their homeowners’ policies include replacement cost contents, ’cause most people want that, they want the protection, but if you’re looking for a bare-bone, basic policy that’s the cheapest price available, it is most likely actual cash value, not replacement cost. Structures or dwellings replacement cost is not always available.

I mean, a lot of times, it can be endorsed or added depending on the quality or condition of the structure, but it’s not always available. Most of the time, for contents, business property replacement cost is available.

I’m very clear with somebody if it’s an actual cash value policy or there’s actual cash value endorsement because, at the time of the loss, I don’t want them to be shocked or surprised that that’s how it’s being settled. A lot of times, one of the things we see is with business property; you have a large piece of manufacturing equipment that costs $100,000, we schedule it on the policy at actual cash value, well, five years from now, the technology has changed. They’re gonna pay 40 to 50,000, and you’re not gonna be able to find new equipment for that price.