Cost Confusion?

Cost Confusion? – Introduction
Are you confused between the insurance terms “Actual Cash Value” and “Replacement Cost”? Many property insurance policies such as home and renter’s insurance are sold with a choice to add “Replacement Cost.” Is it worth the extra cost? Understanding the difference between “Actual Cash Value” and “Replacement Cost” can help with this choice.
“Cost Confusion”
Property insurance was initially intended to restore the current value of the damaged, stolen or destroyed property. An Actual Cash Value claim’s settlement adjusts for the loss of value over time from wear and obsolesce known as depreciation.
Examples:
1. A shingle roof that has 10 years of wear is worth less than a new roof because half of its 20 year useful life has been consumed.
2. A 10 year old TV may still work fine but it doesn’t have the new features of the current models.
Insurance has evolved with the option of claim’s payments for a property loss at “Replacement Cost” or paying a property loss based on the price of a new similar item. This means a higher dollar settlement of your claim because no depreciation is deducted.
Recoverable Depreciation
Replacement cost settlement is a process. Except for small claims, the first payment for your loss will still be the actual cash value estimate. Your claim document will show a line for “recoverable depreciation” which is what your claims adjuster is expecting to add to your compensation for depreciation as your items are replaced or repaired. You will need to send your claims adjuster proof of replacement of the items to receive this addition compensation. The end result is compensation based on the cost of the items as replaced.
Replacement Cost Settlement Example
Most people have a pretty good idea of what their television cost so it makes a perfect example. In our example, your damaged TV is five years old with an original purchase price of $500 and a current value of $250. A new TV with similar features now sells for $400. Your claims document shows a “Recoverable Depreciation” of $150.
First, you receive a claims payment of $250, the Actual Cash Value. You decide on a larger upgraded TV for $600. After the receipt is submitted, supplement claim’s payment is provided of $150.
Replacement cost won’t pay for the upgrade but you do receive the additional claims payment (recoverable depreciation) based on a similar item.
Summary
The Replacement Cost option is an additional cost; however, it is a clear benefit if you need to use your insurance. It shifts how your damaged, destroyed or stolen property is evaluated and can lead to a much higher claims settlement.