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Actual Cash Value vs. Replacement Cost: What’s the Difference?


by Thompson Insurance, Inc.

Business owners buy insurance to make themselves financially whole again in the event of a loss so they can get back up and running. The majority of questions we tend to get are ones dealing with how much will actually be paid by the insurance company in the event of loss or damage to covered property. Whether you’re concerned with your building, its contents, or various types of equipment, it’s important to understand the settlement valuations that insurance companies use.

While most business owners know the basics, they don’t always understand exactly how the insurance company is going to calculate the amount they’ll pay out for a loss, which all depends on how your property is valued. Many think that the value for the property listed in the Declarations Page of their policy is going to be what they are paid. However, the value listed in the Declarations Page is the maximum the insurer would pay, depending on the Valuation Method of the property in question.

The two Valuations seen most often are “Replacement Cover Value” and “Actual Cash Value”. If you’ve valued your property based on its replacement cost, the payout is going to be a lot different than had it been based on its actual cash value (ACV). Here’s why.


Replacement cost is just how it sounds; the cost to replace the building exactly how it stands today, with materials of like kind and quality. This includes being built on the same property with the same or comparable material, as well as the cost to replace things like office furniture, computers, and other equipment.

On the other hand, ACV is typically considered replacement cost minus depreciation or the current market value of the property.  This means replacing the building in similar kind and quality, less depreciation. Therefore, your actual loss payment could be much less than you anticipated.


In order to determine the ACV, the insurance company will simply subtract the percentage of depreciation from the total replacement cost, to determine your loss payment.


The best advice would be to speak with your insurance agent about the pros and cons of each and what that would look like in the event of a loss. The premium is obviously going to be higher with replacement cost, but most business owners would agree that it’s worth the cost if you had to rebuild.

Whether you’re nearing retirement and don’t plan on continuing the business, or you simply wouldn’t build the property back the way it was due to the expense, ACV may actually be the better option for you.

But for most business owners, valuing at replacement cost is going to give them a great deal of peace of mind knowing that if their building was to be burned to the ground, things would eventually return right back to the way they were.

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