When choosing an insurance policy for many different types of insurance, you’ll need to decide whether to go with Actual Cash Value (ACV) or Replacement Cost Value (RCV) coverage for your property. These terms determine how much money you’ll receive when you file a claim for damaged, stolen, or lost items. While this decision is often discussed in the context of homeowner’s insurance, it applies to many other types of insurance as well. Let’s talk about why Replacement Cost Value (RCV) is typically better for customers across the board.
What is Actual Cash Value (ACV)?
ACV reimburses you for the value of your property at the time of the loss, factoring in depreciation — the reduction in the value of any item due to age, wear and tear, or obsolescence. Here are two examples:
Homeowner’s Insurance
If your 10-year-old roof is damaged, ACV will only pay the depreciated value of the roof, which considers age, condition, and useful life into the depreciable amount. This value might be a fraction of what it costs to replace the roof with a new one.
Auto Insurance
In a total loss scenario, ACV will pay the car's market value, which could leave you short if you’re trying to replace it with a newer or similar model or if you still have an auto loan on your now depreciated vehicle. With ACV coverage, you could wind up paying for years on a totaled vehicle that you can no longer use.
What is Replacement Cost Value (RCV)?
RCV reimburses you for the current cost to replace the item with a new one of similar quality, without considering depreciation. This ensures you can repair or replace lost or damaged property without significant out-of-pocket expenses.
Homeowner’s Insurance
If that same 10-year-old roof is damaged, RCV will cover the full cost to replace it with a new roof, regardless of its age. Most carriers tend to process these claims in the form of two payments. When an inspection is performed on your home for a claim, the adjuster will normally pay you an initial settlement to commence repairs, it's important to remember this amount is usually NOT the entire settlement amount. An adjustment is usually taken for your deductible, and what is called recoverable depreciation. When your roof replacement is completed, the adjuster will then release the remaining funds in the form of a 2nd payment releasing the amount withheld for recoverable depreciation making up the full amount.
Examples:
***Example for ACV Coverage:
$20,000 Total Cost to Replace your Roof
$ 1,000 Less Deductible
$ 5,000 Less Non-Recoverable Depreciation Adjustment
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$14,000 Total Insurance Settlement
***Example for RCV Coverage:
$20,000 Total Cost to Replace your Roof
$ 1,000 Less Deductible
$ 5,000 Less Recoverable Depreciation Adjustment
—--------
$14,000 Initial Settlement (1st payment)
$ 5,000 Add Recoverable Depreciation (2nd payment when work completed)
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$19,000 Total Insurance Settlement
Renter’s Insurance
If your TV is stolen, RCV would pay the cost to replace it with a new TV of similar make and quality, instead of the depreciated value of your old one.
Where Does the ACV vs. RCV Debate Apply?
This debate affects various types of policies, including:
Auto Insurance
Standard ACV policies typically reimburse the depreciated market value of your vehicle if it’s totaled, but optional new car replacement coverage can pay to replace your car with a brand-new equivalent.
Renter’s Insurance
ACV will reimburse the depreciated value of stolen or damaged personal belongings, while RCV renter’s insurance covers the cost of brand-new replacements, so you can restore your property and your lifestyle.
Business Property Insurance
ACV pays the depreciated value of damaged equipment, furniture, or inventory, while RCV enables businesses to replace lost assets with new ones, minimizing business disruption.
Personal Property Insurance
ACV is often used for high-value items like electronics or jewelry but may fall short of replacement costs. RCV ensures you can replace valuable personal items with new ones without additional expenses.
Flood and Disaster Insurance
Federal flood insurance, for instance, often defaults to ACV for personal property but offers RCV for structural damage under certain conditions.
Commercial Vehicle Insurance
Companies insuring their fleets face the same kinds of decisions. RCV ensures essential vehicles can be replaced fully in the event of accident, theft, or other damage.
Why Replacement Cost Value (RCV) is Better for Customers
While RCV policies often have higher premiums, they offer clear advantages for most people:
Full Coverage for Rebuilding or Replacing
RCV ensures you can fully repair or replace your home, car, or belongings after a loss, avoiding the financial shortfalls common with ACV.Less Financial Stress After a Loss
Dealing with damage or theft is already stressful. RCV eliminates the worry of paying the difference between an ACV payout and the actual replacement cost.Protection Against Inflation
RCV covers the current cost to replace items, not their depreciated value, making it a smarter choice in times of rising inflation with higher construction or material costs.Maintaining Home and Asset Value
With RCV, you can replace damaged property with new equivalents, maintaining the value of your home or business.Improved Recovery for Businesses
For businesses, RCV ensures you can replace essential equipment or inventory quickly, minimizing downtime and lost revenue.
Why Do Some People Choose ACV?
The primary reason people choose ACV is lower premiums. ACV policies are more affordable, making them attractive to those on tight budgets. However, the potential out-of-pocket costs during a claim often outweigh the upfront savings.
The Bottom Line: RCV is Worth It Across All Insurance Types
While Actual Cash Value policies might seem cost effective upfront, the reduced payouts can leave you underinsured when you need it most. Replacement Cost Value policies provide greater peace of mind, covering the full cost of restoring or replacing your property. Whether you’re insuring a home, car, personal belongings, or business assets, RCV means you will not be stuck footing the bill for depreciation, making it the better choice for most customers.
In the ACV vs. RCV debate, Navisure agents almost always recommend Replacement Cost Value coverage to ensure our clients are fully compensated in the event of a loss. If your budget allows for it, investing in RCV coverage is a smart move to safeguard your financial security and ensure a smooth recovery after any unfortunate loss. If you have questions about which type of insurance would be best for both your needs and your budget, just contact Navisure Insurance Group. We will be happy to talk you through your options.
TROY VANDERMEER | VICE PRESIDENT
Troy attended Aquinas College in Grand Rapids, MI, and obtained a degree in Business and Technology. After graduating, he began his career as an insurance adjuster for a large-scale carrier. This included almost 10 years of experience, with roles such as property catastrophe, marine, and recreational vehicle claim handling. Troy learned the ins and outs of how insurance companies operate while also perfecting the technical aspects of the industry. This gives him an edge when working with clients regarding what coverage best fits their needs. As a proponent of leveraging technology, his goal is to simplify the process of getting insured without clients having to sacrifice their time.
In his spare time, Troy coaches high school soccer, enjoys golfing, fly fishing, and spending time with his family and friends.