“Replacement cost” and “actual cash value” are two of the most common calculations insurers
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insurers use to determine the amount a customer will receive if they make a home insurance claim or a car insurance claim. In other words, you could either be reimbursed for the cost to replace the lost or damaged item or its actual cash value, depending on what it says in your policy. So, what’s the difference? And how do these calculations really apply when you make a claim
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claim? Let’s take a look.
Replacement cost
If your policy says it will cover the replacement cost of an item that is lost or damaged, the dollar amount you’ll be paid is equal to the cost you’d need to replace that item with a new, similar product of like kind and quality. possible. For car insurance, this only applies if you have a depreciation waiver on your policy. If you have a depreciation waiver, the settlement is typically the vehicle's replacement cost, the manufacturer's suggested retail price, or the original purchase price, depending on which amount is lowest. Conditions and terms can vary depending on your province.
Actual cash value
If your policy is set up to cover the actual cash value of an item that is lost or damaged, the dollar amount you’ll be paid is equal to how much the exact item would be worth today. This considers the original price you paid for the item, but it also considers depreciation (the natural decrease in an item’s value over time, usually due to wear and tear) and the physical condition the item was in on the day of the loss. Most insurance companies will use standard guidelines (known as “depreciation tables” in the insurance world) to determine an item’s actual cash value — or they’ll contact a professional retailer or appraiser to determine what a similar used item would cost to buy.
The premium
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premium you pay when you have an actual cash value policy may be lower since the reimbursement you’d receive in the event of a claim is generally much less than you’d receive with a replacement cost policy.
How do replacement cost and actual cash value work in real life?
Keep in mind that these examples are intended to give you a basic understanding of how actual cash value and replacement cost work, but policy terms and conditions may vary. If you have specific questions about your own policy, speak to your insurance broker.
Picture this: A pipe in your basement bursts and damages the sewing machine you purchased 30 years ago for $500. After consulting a professional sewing machine technician, your insurer informs you that the machine is damaged beyond repair. So, how much will you be reimbursed?
With replacement cost:
You’ll be reimbursed for the value of a new sewing machine of a like kind and quality to the one that was destroyed in the flood. In this case, you may be able to purchase a new sewing machine for around $800.
With actual cash value:
You’ll be reimbursed for the value of a similar 30-year-old sewing machine in the same condition as the one that was destroyed in the flood. In this case, you might receive around $80.
Picture this: A rear-end collision on your way home from work lands your two-year-old SUV in the shop. After receiving an estimate for the repairs, your insurer decides your vehicle isn’t worth repairing. How much will you be reimbursed?
With replacement cost:
Most car insurance policies only allow for actual cash value, but some insurers may allow you to add coverage to your policy that takes depreciation out of the equation. Depending on the terms and conditions of your policy, you'll either receive a settlement for the amount you originally paid for your SUV, the manufacturer's suggested retail price, or the replacement cost for the same model, depending on which amount is lowest.
With actual cash value:
You'll be reimbursed for the amount your insurer determines you would need to buy a two-year-old SUV of a like kind and quality, in the same condition your own vehicle was in immediately before the accident occurred. In this case, you may receive around $48,000 to put towards a new vehicle, instead of the $70,000 you originally paid for it.
Reach out to your group’s licensed broker to learn how your own coverage works or find out how your deductibles might apply in situations like these.
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