Making The Most Of Your Home Insurance Claim
Understanding the Difference Between Actual Cash Value and Replacement Cost
The worst time to learn the difference between actual cash value and replacement cost is after you’ve had a major catastrophe or loss. Imagine submitting a claim only to discover that replacing the item that was lost, stolen or damaged costs twice as much as the amount your insurance company lists as the actual cash value.
Actual Cash Value
Sometimes referred to as “market value,” actual cash value is what you would get for your exact item, factoring in wear and tear. So what you get for a well-worn, older item is well below what the new versions sell for because the insurance company deducts an amount for depreciation.
Exactly as it sounds, replacement cost is the cost of buying the new version of a similar kind or quality. Unlike actual cash value, the age and condition are not factors in determining the claim amount and, for that reason, you will likely pay a premium for this coverage.
Similarly, you should insure your home for its replacement value rather than its market value; the cost of materials and labor to rebuild it could exceed the market value. Check with a local builder to see if there have been substantial increases in material and labor costs.
Moreover, consider adding ordinance and law coverage to your policy to cover you in situations in which upgrades are required to meet current building codes (including undamaged parts of the home), since these additional costs would not be covered under the typical homeowners’ policy.