How it Works
Homeowners insurance policies offer actual cash value or replacement cost coverage to replace your damaged, stolen, or destroyed personal property.
- Replacement cost is what you would pay for the item at today’s cost.
- Actual cash value is what you would pay for a similar item at today’s cost minus depreciation (replacement cost minus depreciation).
- Depreciation is a decrease in value due to wear and tear or age.
Your home and some furnishings were damaged during a recent wildfire. You made a claim to your insurance company and have met your deductible. Now you are looking at replacing the damaged furnishings. Last year, you bought a sofa for your living room for $2,000. The amount of money you will receive to replace your sofa depends on the type of coverage you have.
- If you have actual cash value coverage, the company might pay you $1,500 because that is the actual cash value of the sofa today (replacement cost minus depreciation).
- If you have replacement cost coverage, the company will pay $2,100 because that is what it would cost to buy a similar sofa today.
- With actual cash value coverage, you will receive a payment from the insurance company for $1,500.
- With replacement cost coverage, you will first receive a payment from the insurance company for $1,500. When you submit your receipt for the sofa, the company will pay for the difference between $1,500 and the amount you paid to replace the sofa up to $2,100.
$2,100 = Amount of the receipt for your new sofa
$1,500 = Actual cash value of the sofa and amount sent to you by the company after you filed a claim
$600 = Amount the company will send you after you submit a receipt for $2,100
Note: If you have replacement cost coverage, most insurance companies will give you the actual cash value of an item and require you to submit a receipt for the new item before paying you the remainder