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Understanding Insurance Terms – Actual Cash Value vs. Replacement Cost

It is vital to understand specific terms found in insurance policies. The inability to do so may result in an unwanted surprise such as a lower than anticipated claim payment following a loss.  For example, Actual Cash Value (ACV) and Replacement Cost (RC) are two different methods of valuation that will determine how the insured is indemnified.

When it comes to homeowner’s or property insurance, there are, basically, two methods of establishing the value of the damaged property with resultant claim payment.  ACV is, typically, calculated by determining a replacement value then subtracting depreciation.  The adjuster will consider how much of the useful life of the property has expired and reduce the settlement accordingly.

The most favorable coverage option is to value the property at Replacement Cost. This option 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 decline in value due to use, wear or tear or economic demand.”

It is essential to have a clear-cut understanding of these terms and others like it along with valuations and coverages when buying insurance for business or personal reasons.  An independent risk management advisor can assist by ensuring that the proper coverage is chosen, and claims (in case there are any) are processed appropriately.

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Our areas of expertise include:

  • Enterprise Risk Management (ERM)
  • Cyber Security & Cyber Liability Insurance
  • Construction Management
  • Customized Risk Management Assessments (RMAs)

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