When it comes to repairing or replacing your property, homeowners insurance policies can provide actual cash value coverage, replacement cost value coverage or both to calculate how you’re compensated for damages or loss after a covered event.
This article will explain the difference between each type of coverage and how to determine what coverage your current policy includes.
- Actual Cash Value (ACV) Coverage
- Replacement Cost Value (RCV) Coverage
- What Is the Difference Between ACV and RCV Coverage?
- Do I Have ACV or RCV Coverage?
- What Is Extended Replacement Cost Coverage?
- Final Thoughts
Actual Cash Value (ACV) Coverage
Over time, the value of your belongings decreases because of wear and tear or aging. Actual cash value (ACV) coverage factors in depreciation as part of the calculation of how much your insurer will pay to repair or replace your property. That means you’ll be compensated up to the value of your property at the time of damage or loss instead of its value when you purchased it.
Let’s consider a laptop. If it’s two years old, you probably won’t be able to sell it for the same amount you paid for it new. Even if it’s in excellent condition, regular wear and tear and the age of the technology drive down the laptop’s value.
If that laptop gets stolen from your car and you have ACV coverage for personal property, your insurance company will use its depreciated value when determining what to pay you. So, if you paid $1,000 for a laptop, but it was worth only $600 at the time of the theft, your insurer would compensate you up to $600, minus any unmet deductible.
Replacement Cost Value (RCV) Coverage
Replacement cost value (RCV) coverage is meant to help you replace your property with the same or similar quality items. If you have chosen RCV coverage, your insurer will look at how much you originally paid for something and consider how much it would cost to repair or replace it with the same or similar items at today’s prices.
So, if your property is damaged or lost due to covered events and you have RCV coverage, your insurer will reimburse you the cost to replace your items, as long as that amount doesn’t exceed the total value of your policy.
Let’s consider the laptop again. With RCV coverage, you’ll be reimbursed enough to purchase the same laptop or one of similar quality. So if you paid $1,000 for the laptop, your insurer would compensate you up to $1,000 to purchase a replacement.
Some insurers offer adjustments for inflation as part of RCV coverage. If replacing the laptop with a similar quality laptop would cost you $1,200 at today’s prices, you could qualify for up to $1,200 in compensation.
What Is the Difference Between ACV and RCV Coverage?
Both ACV and RCV are used to determine how much to reimburse you for damages or loss to property after a covered event. RCV looks at how much it would cost to replace your property with the same or similar quality items. ACV looks at how much your property was worth at the time of any damages or loss by factoring in depreciation.
You can think of actual cash value as the replacement cost value minus any depreciation.
when calculating compensation for damages or loss to your property | value when calculating compensation for damages or loss to your property |
of your property at the time of damages or loss | items of the same or similar quality as when your property was first purchased |
- $400 (Depreciation factored in) $600* (total compensation) | - $0 (No depreciation factored in) $1,000* (total compensation) |
* Any unmet deductible would also be subtracted to determine the total compensation. |
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Because of depreciation, the actual cash value of property is often less than the replacement cost value.
While you can expect to pay lower premiums on a policy with ACV coverage, you should also expect higher out-of-pocket costs in the event of damages or loss to your property. Policies with RCV coverage carry higher premiums but will also provide more financial protection.
Do I Have ACV or RCV Coverage?
It’s typical for standard homeowners insurance policies (HO-3s) to include RCV coverage for your dwelling and ACV coverage as the default for personal property. If you have a standard policy, your insurer may offer the option to upgrade to RCV coverage for your personal property, but this upgrade will increase your premiums.
Comprehensive homeowners (HO-5s) insurance policies typically include RCV coverage for your dwelling and personal property.
If you’re unsure whether you have ACV or RCV coverage, you can check your policy’s declarations page. The declarations page provides a summary of your policy including who is insured, what your coverage limits are for each type of protection you’ve purchased and the amounts of your deductible and premium. You’ll also likely find designations of ACV or RCV coverages.
Many insurance companies provide access to your policy documents and declarations page through their company websites and apps. You will likely be prompted to create an online account before you’ll be able to view any policy documents.
What Is Extended Replacement Cost Coverage?
In addition to whether you have ACV or RCV, the amount you’re reimbursed for a claim will always depend on your coverage limit. Extended replacement cost coverage is an endorsement that applies to RCV coverage and can kick in to increase your coverage limit if a covered peril causes damages or loss exceeding your policy’s existing limits.
Let’s consider a home that has a dwelling coverage limit of $250,000. If damages to the home exceed $250,00 for repair, an extended replacement cost endorsement would kick in to increase reimbursement on a filed claim. So, with a 10% extended replacement cost coverage endorsement, you could qualify for up to $275,000 to repair your dwelling.
The amount of extended coverage you can purchase varies depending on the insurer, and not all insurers offer extended replacement cost coverage. Also, insurers that offer this kind of endorsement may have requirements you have to meet to qualify, and your policy deductible(s) will still need to be met first.
Final Thoughts
In the event of damages or loss to your property, how much you’re compensated to repair or replace your property will depend on whether your homeowners insurance policy has ACV or RCV coverage.
A policy with ACV coverage will cost you less in premiums, but it could cost you more in the long run if you have to repair or replace your property. ACV coverage compensates you only up to your property’s replacement value minus depreciation. So, you’ll need to pay out of pocket for any difference to replace your property.
While RCV coverage will result in higher premiums, when thinking of the financial impact of unexpected damages or loss, RCV coverage will do a better job of making sure that you come out financially where you started. With RCV, you get compensation to replace your property with the same or similar items, within your policy’s limits.
To determine which coverage better meets your needs, you should assess the value of your property, how much savings you have and how much you’re looking to spend on homeowners insurance.
Whether your policy provides ACV or RCV coverage, it’s important to remember that your deductible and coverage limits will also impact the final amount that you are reimbursed for any claims.
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