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Home Insurance Fort Worth TX Actual Cash Value (ACV) vs. Replacement Cost (RC)

When it comes to home insurance, there are a number of ways in which insurance companies will calculate the amount payable for lost, stolen or damaged property. The two most common ways of going about compensation are Actual Cash Value (ACV) policy, otherwise referred to as Market Value policy, or the Replacement Cost policy, both of which are explained below.

What is Actual Cash Value (Market Value) Home Insurance Policy?

Actual Cash Value, otherwise referred to as market value, can be described as the actual cost of the damaged or stolen property at the time of loss — minus depreciation.

What is Replacement Cost Home Insurance Policy?

Just as the name suggests, replacement cost policy is described as the cost of replacing the stolen or damaged property with an item of similar, use and material/quality. The difference between this policy and the Actual Cash Value policy is that there exist zero depreciation.

Actual Cash Value Policy Explained

In order to get a better definition of the actual cash value policy, we are going to look at an example.

The Jacksons and the Smiths have been next door neighbors for quite some time now. Both their properties were built back in the year 2000. Their homes share similarities in the floor plan as well as roofing. Both the families have not replaced their roofs since construction. However, the Jacksons are covered by the Actual Cash Value home insurance policy, while the Smiths opted for the Replacement Cost home insurance policy.

During a heavy thunder storm, both their roofs are fully damaged. These two families have a $1,000 deductible and both roofs suffered damage worth $20,000.

Since the Jacksons are covered by the Actual Cash Value, their roof is worth far less than what it was during construction due to old age. During construction, it was worth $20,000, however, 17 years later, its worth $8,000, meaning the depreciation value is $12,000. This means that the Jacksons will pay $13,000 (depreciation plus deductible) leaving the insurance company to pay $7,000.

Replacement Cost Policy Explained

For the Smiths, they will only pay the deductible fee of $1,000, with the entire cost for roof replacement less the deductible being covered by the insurance company. In other words, the insurance company pays $19,000, original roofing cost, $20,000 less $1,000 deductible.

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