Replacement Cost vs. Actual Cash Value: What That Means for Your Property Insurance Policy

A 2018 survey found that nearly half of all property owners don’t understand terms like “replacement cost” and “actual cash value”. If you don’t know what these terms mean, you’re going to have problems understanding your business property insurance as a business owner, particularly if you ever find yourself needing to file a claim.

Don’t let the DEC page fool you; the limits on a DEC page are the maximum that you could be potentially paid, not how much you’ll actually be paid, according to The Balance. If that’s the case, then how much money will you actually receive when it comes to your property?

Here’s what you need to know regarding replacement cost vs. actual cash value for your property insurance policy.

How Much Will You Be Paid for Your Claim?

What you’re going to get financially via your property insurance policy actually depends on a few factors. If you’re diligent about keeping track of important documents, describing what was missing and the lost value of your property, these parts are incredibly important in order to make sure you get the right money back through your business property insurance.

Depending on what type of policy you have is going to depend on how much you’ll get back. Each type of coverage has its own exposures that they cover for a certain price. Be on the lookout for the exclusions and special limits that are included in your policy. Unfortunately, not everything can be covered under a sole policy.

While not standard for every insurance company, it doesn’t hurt to ask what your company covers. With all of this to consider, it’s critical to read the small print about the claims in your policy. Many people think they are going to get the full price they put into the home when it comes to business property insurance. But that is never the case.

Actual Cash Value (ACV) Definition

The actual cash value isn’t the entire value you paid for the property. It’s actually the depreciated value of a property or property item at the time of the loss. For example, think of the actual cash value as a garage sale. At that point, you’re getting the minimum of what your item is really worth. The whole point of this is to take what the original value was and subtract an amount for depreciation.

The problem with this is that you’re simply not getting all of your money back, which might put you in a tight spot to where you’re going to have to get the rest out of pocket. While some money is always better than no money, no one wants to think about how they aren’t going to get their full value back through their business property insurance.

Replacement Cost Definition

This is when you’re going to get the equal amount back from what loss you initially paid for. It’s the best way to completely replace lost items. Since you’re actually getting the real cash value back, this option is much better than going with actual cash value. This puts you in a position that you were before the loss, which means you will have the means to build everything back the way it was originally. If you want the money needed to replace parts of your business through your business property insurance, this is the best way to do it.

Other Quick Things to Note

Don’t just expect a cash sum. You have to detail everything that was lost heavily, and items must be replaced before any cash is handed out. Depending on the size of the item, additional protocols might be required in order to ensure safety. Give the company time to get your settlement figured out properly with a thorough investigation. When it comes to the things you’ve lost, you need to know every facet about them. On top of that, any receipts will help immensely.

There’s a two-step process to receiving the money needed to replace any properties. The first check, which is the actual cash value, has to be used first in order to replace items needed. And it must be proven. After that, you get the second payment via check. Once you get that check, consider yourself fully compensated.

Sometimes, insurances will repair items instead of replacing them. They will also only offer ACV if an item is determined obsolete or can’t be replaced. 

About Haughn & Associates

Founded by Michael Haughn in 1986, Haughn & Associates is a full-service, family-owned, independent insurance agency based out of Dublin, Ohio. H&A strives to provide the best possible price and unique insurance solutions across a myriad of industries, including construction, IT, Habitation & Commercial Property, Agriculture, and Engineering. Devoted to providing the best of business insurance, life and disability insurance, personal insurance, employee benefits, and bonds, H&A is proof that success lies in long-standing client relations and satisfaction. To learn more about how H&A can be of service to you, contact us at (877) 802-2278.