Replacement Cost Versus Actual Cash Value

Replacement Cost Versus Actual Cash Value

There are various ways that your insurance company can calculate the amount it will pay you for a loss. However, the two most common ways are replacement cost and actual cash value. Each method is different, and it’s essential to understand the difference between the two when purchasing a property insurance policy.

What is replacement cost?

Replacement cost provides the most favorable payment terms between the two. Simply stated, it means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose. This applies unless the insurance limit or the cost spent repairing or replacing the damaged property is less.

For example, if you have computers stolen from your law firm, it will reimburse you the full cost of replacing them with new computers of like kind and quality.

What is actual cash value?

Actual cash value, also known as market value, equals the cost minus any depreciation.   It is supposed to represent the dollar amount you could expect to receive for the item if you sold it in the marketplace. The insurance company determines the depreciation based on a combination of objective criteria (using a formula that considers the category and age of the property) and subjective assessment (the insurance adjuster’s visual observations of the property or a photograph of it).

We recommend purchasing your insurance policies with replacement costs instead of actual cash value whenever possible.   If you have any additional questions on how replacement cost and actual cash value affect your law firm’s insurance policies, please contact our office