The question what is Replacement Cost? How does it differ from Actual Cash Value, is asked to my staff and I at least 5 times a week. Consumers are very confused and do not know the difference and most have never been explained the difference. I wanted to take a few minutes to discuss the coverage’s and I hope to clear up the confusion for all Floridians.
If you are searching the market for a home insurance policy specifically the Florida home insurance market then you should know that there are two types of settlement clauses: Actual Cash Value and Replacement Cost. It is a fact that the standard affordable home insurance policy will be able to provide you with coverage of contents up to 50 percent of the amount for which your residence (Dwelling or Coverage A) has been insured. In this way you will be of the opinion that selecting one loss settlement over the other has no significant impact. However, this automatic coverage will provide you with the actual cash value for any sort of household item such as furniture, clothing as well as the many other types of household items that have been destroyed, damaged and even stolen.
You must note that the first key element of Actual Cash Value is that of the replacement cost minus depreciation. Which means that if you do not carry replacement cost coverage the items damaged, if covered, will be paid on the basis of original cost minus depreciation or Actual Cash Value (ACV). It is this element in a home insurance policy which will take into consideration various factors such as wear and tear and also the market demand for something of value. In spite of the fact that it is possible to build new homes then there is also its corresponding fact that, the older your home is, the lower will be its value. However, the land on which your home has been built will rise in terms of its value. The reason for this is that land being a finite source and this is why you cannot include it on any standard homeowner’s insurance policy.
With regards to replacement cost we can then determine that if coverage is carried and you are able to prove the original cost of the item damaged that it would be paid on a basis to replace the item in a sense to make you whole again, which is what insurance policies are supposed to do. The cost to add this coverage as an endorsement to your standard home insurance policy can vary from carrier to carrier. Here in Florida the coverage can be between $150-$750 additional premium on average to add the replacement cost endorsement to your homeowners’ policy. It is recommended that you keep in a safe place all receipts and bill of sale of items in your home.
With regards to your Florida home insurance policy, it is also possible to ascertain the actual cash value of your home by the fair market value of a home. This can be done by the amount at which similar types of homes are sold. An affordable home insurance policy company will use the formula to base claims payments accordingly. It is a fact that the price of homes can differ as they are based on many different factors. This is why the value of your home or the land on which it has been built will either appreciate or depreciate.
Another factor is if your actual dwelling is covered for Actual Cash Value vs. Replacement cost for a conclusion on the cash value of a home is the rule of “broad evidence”. It is this rule which will take into consideration the fair market value of a home and its replacement cost less the depreciation cost. There will be many people who will be in favor of one definition but both are fundamentally used to determine the cash value of a home. It really depends on the insurance carrier and the claims handling procedure that your insurance carrier has in place.
So, with regards to your home insurance policy- Replacement cost is the amount the insurance company would pay for the item at today’s value. And the actual cash value is what you would have to pay for a corresponding item at today’s value less depreciation.
Read more about: How insurance companies determine the replacement cost of your home.