Understanding Actual Cash Value vs Replacement Costs in Insurance Policies

Property insurance in Florida is a confusing and complicated product. There’s flood insurance, hurricane insurance, homeowner’s insurance, personal property insurance – the list goes on. Once an individual determines the types of insurance that they need, they then face the complexities of evaluating the specifics of what coverage to include in their policy. One of the most important considerations in property insurance is whether to get an insurance policy that pays actual cash value or replacement cost value for items that are lost or damaged. These two are vastly different in outcomes and should be carefully considered based on your situation.

Actual Cash Value vs Replacement Cost Value

As noted above, the two payment policies are very different in what they pay, and as a result, what they cost. Actual cash value policies pay the price of the good immediately prior to damage or loss. In the case of a computer that was bought for $1000 three years ago and has since been lost in an event covered by your property insurance, the actual cash value will be the $1000 that you paid for the computer less depreciation to determine its current “actual cash” value. If we assume that this computer depreciates by $250 per year, and it’s three years old, then the computer will have an actual cash value of $250 after the $750 of depreciation, which is what the insurer will pay under an actual cash value policy.

Comparatively, the replacement cost value doesn’t factor in depreciation, but rather, the costs to immediately replace. In the above case, the replacement cost value would be the cost to replace with a comparable computer. Although the computer’s actual cash value may only be $250 (computers lose their value pretty quickly!), replacing the computer with a comparable version may cost $800. Here, the replacement cost value of the computer is $800, which is what a replacement cost value policy would cover. Compare the two: the computer is only “worth” $250 but it would cost $800 to replace. If you suffer damage to property, the difference between actual cash value and replacement cost value can be enormous.

Does the Insurer Determine Values?

The insurer does not have unilateral authority to determine the actual cash value or the replacement cost value. Although the insurer will most often present their valuation, as the insurance policy holder, you have the right to challenge that value. In some cases, the insurer may accidently undervalue your property, or they may do so intentionally in the hope that you simply accept the offer. When dealing with insurance claims, legal counsel can save you thousands by ensuring full and timely payment

Florida Insurance Claims Lawyer

At the Law Office of William J. Roe, we have aided Florida residents in resolving denied insurance claims and other insurance disputes, such as those over value. If you’ve had an insurance claim denied or believe that you have been treated unfairly by your insurer, please contact our offices today for a free consultation. The sooner we hear from you, the sooner we can help.