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Actual Cash Value vs. Replacement Cost

When it comes to energy insurance, there are two ways to insure your property or assets: actual cash value, and replacement cost.

In order to make the right choices for your company, it is important to know what these two coverage options offer.

Read on to find out which coverage option is best for your company.

Replacement Cost
With replacement cost, the insurance will pay the full amount that is needed to replace the asset. Replacement cost is the cost that it would take to replace what was damaged or destroyed by using similar materials of the same or equal value. This applies unless there is a limit to the coverage, or if the actual cost of replacement is less. Be sure to talk with your agent, or review your policy to find out more about replacement cost, and to ensure that your coverage limits are high enough. 

Actual Cash Value
Actual cash value, also known as ACV is a bit more difficult to define. Actual cash value differs from replacement cost in that actual cash value takes into account depreciation. Depreciation is the asset’s natural decrease in value over time. ACV is calculated by subtracting depreciation at the time of loss or damage, from the replacement cost. Actual cash value is calculated based on the amount that the property could be sold for – which is usually less than it would cost to replace it. Actual cash value can also be calculated by taking into account the “fair market value” of the asset, or by using the “broad evidence rule” -which combines all relevant evidence to find the value of the damaged property.

The main difference between replacement cost and actual cash value is depreciation. When depreciation is taken into account, the insurance payout is generally lower.

As with most insurance policies, be sure to talk with your agent to ensure that your insurance policy is comprehensive enough. Talk with Texas Outdoor Insurance find out more about a policy for your company. Texas Outdoor Insurance specialists would be happy to help you find a policy that’s right for you.