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Replacement Cost Coverage versus Actual Cash Value Coverage

Homeowners will often not understand the difference between replacement cost coverage and actual cash value coverage.  Both of these terms are used to describe the insurance coverage that will cover you in the event your property is damaged or stolen.  However, the amount of coverage you receive will depend in large part on whether you have replacement cost coverage or actual cash coverage.

What Replacement Cost Means

Replacement cost is the amount it would cost to replace your damaged, destroyed, or stolen items with the same or similar items.  The replacement cost is generally calculated as the initial amount you paid for the item.  If the item is no longer available, replacement cost policies will pay you the initial purchase price of the item so that you can find a similar one.  If the original item is still available, but at a lower price, your claim may be reduced accordingly.

Your replacement cost claim may be paid in two installments.  The first one will send a payment for the actual cash value of the item or half its replacement cost. Once you have performed necessary repairs or purchased a replacement, you can send documentation to your insurer and will then recover the remaining reimbursement. 

Actual Cost Value (ACV) Explained

Actual cost value or ACV refers to a policy that covers your home and your possessions for market value at the time the items are destroyed, lost, or stolen.  Since your items are used, their market value will include depreciation as a factor in assessing your final payout.

Calculating Depreciation

Different insurers will calculate depreciation in different ways.  One of the most common methods will be calculating the item’s value as a portion of its total life expectancy.  For insurance, a roof that should last for about 30 years will be assumed to have no value at the end of that time span.  If your roof is destroyed at 15 years after installation, the actual cash value will be half the original cost of the roof.

Another way to determine depreciation is to divide one by the life expectancy of your item.  For instance, an item with a 10 year lifespan will depreciate at about 10 percent a year.  You can then use this figure to calculate depreciation by multiplying it by the years you have used your item.

Replacement Cost Will Be Greater than ACV

For almost any homeowner, the replacement cost policy will offer greater returns in the event of damage.  Replacement cost coverage will cover the true cost of replacing the destroyed, lost, or stolen item, while actual cash value may not always suffice.  For instance, a laptop purchased for $2,000 three years ago would likely be worth far less using the actual cash value method.  The insurer would write you a check for somewhere around $700, and this sum may not cover the cost to replace the item.  Speak to an insurance agent or consult with a homeowners’ insurance attorney to ensure you obtain the best coverage for you.

Greenberg Stone and Urbano:  Exceptional Homeowners’ Insurance Attorneys Assisting Homeowners Across South Florida

If your homeowners’ insurance claim has been denied or you need assistance with any homeowners’ insurance matter, contact the Miami Homeowners’ Insurance Attorneys at Greenberg Stone and Urbano  We have over 130 collective years of experience representing homeowners in need across South Florida.  Our firm offers the dedication and knowledge you need to successfully resolve your homeowners’ insurance matter.  We have been honored with a coveted AV rating from Martindale Hubbell and the Miami Herald recognized us as a top firm in South Florida.   Allow our outstanding attorneys to provide you with superior legal services in the South Florida area.  Call us at (888) 499-9700 or (305) 595-2400 or visit our website to schedule your initial consultation.


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