ACV v. Replacement Cost

We get asked a lot about the difference between ACV (Actual Cash Value) and Replacement Cost. Here are the "insurance speak" definitions from IRMI:

ACV: In property and auto physical damage insurance, one of several possible methods of establishing the value of insured property to calculate the premium and determine the amount the insurer will pay in the event of loss. ACV is typically calculated one of three ways: (1) the cost to repair or replace the damaged property, minus depreciation; (2) the damaged property’s "fair market value;" or (3) using the “Broad Evidence Rule,” which calls for considering all relevant evidence of the value of the damaged property.

Replacement Cost: A property insurance term that refers to one of the two valuation methods for establishing the value of most of the insured property for purposes of determining the amount the insurer will pay in the event of loss. It is usually defined in the policy as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation.

The easiest way to explain the two (for my clients) is that your home owner insurance cost is replacement cost (your $650k home built in 1930 is still worth 650k and probably more than when it was built when lumber was cheap and milk was .02 cents) while your Auto is ACV (depreciated cost).

For contractors this is important because tools have a purpose and the drill bought 2 years earlier still does the job it was bought for. Some policies have tools (and scheduled equipment - see prior post) at ACV which is a royal pain in the a$$. Imagine your frustration if the 2003 $52k skid loader is stolen and your agent (and adjuster) tell you it's only worth $23k and oh-by-the-way it now costs $75k to buy one.

Make sure your policy has replacement cost for tools and scheduled equipment. Demand it.