Actual cash value vs replacement cost: what it means for your belongings

What is the difference between actual cash value and replacement cost?

Both are ways of putting a price on something you lost. Replacement cost is what it would cost to buy the same item, or the nearest equivalent, new today. Actual cash value is that price minus depreciation, the amount taken off for age, wear and condition. It is roughly what the item was worth the day before the loss.

Your policy decides which of the two you are paid. A policy that pays actual cash value stops at the used price. A policy that pays replacement cost gets you to the new price, though usually not all at once.

How is actual cash value worked out?

Most insurers start from today's price, then apply depreciation based on how old the item is and how long that kind of item is expected to last. A sofa expected to last ten years that is four years old has used up about 40% of its life, so about 40% comes off. Some insurers also adjust for condition, taking off more for something worn and less for something barely used.

Those choices are made line by line, and each one can be questioned. The age, the expected life and the condition should all be visible on the schedule your insurer sends. Our guide to reading a depreciation schedule walks through checking them.

One dining table, settled both ways

Say a fire destroyed a solid wood dining table you bought four years ago. A similar table costs $2,000 new today, and the insurer gives tables a ten-year life.

Work out your own item the same way in our depreciation calculator.

One table is a small gap. Across a whole house of furniture, clothes, electronics and kitchen things, depreciation on a contents claim can run to thousands of dollars, and on an actual cash value policy none of it comes back.

Which one does your policy have?

Look at your declarations page, the summary at the front of your policy, for the line covering personal property. Some policies pay replacement cost on the house but actual cash value on belongings unless a replacement cost option was added, so check the contents line itself rather than the policy as a whole. Things to look for:

• The words "actual cash value" or "replacement cost" next to personal property, sometimes labeled Coverage C.
• An endorsement, a page added to the policy, that switches your belongings to replacement cost.
• Items paid at actual cash value only. Some policies treat things like clothing, or things that were not in use, this way even on a replacement cost policy.
• Special limits, called sublimits, for categories such as jewelry, cash or collectibles. They cap those items under either kind of policy.

If the wording is unclear, ask your adjuster or agent: "Are my belongings covered at replacement cost or actual cash value?" Ask for the answer in writing, and keep it with your claim papers.

Why the gap is wider for belongings than for the house

A house and the things inside it lose value at very different speeds. Parts of a building are expected to last decades. A laptop, a mattress or a winter coat lasts a handful of years. Because belongings wear out faster, depreciation takes a bigger share of their price, and the difference between the two figures is wider for contents than for the structure.

A contents claim is also made of many small lines rather than a few big ones. The gap is spread thinly across hundreds of items, which makes it easy to miss until you add it up.

How do you get the replacement cost amount?

On a replacement cost policy, the part held back is called recoverable depreciation. You usually get it by replacing the item and sending proof:

1. Find the deadline for replacing things. Your policy sets it, and many people only learn it once it has passed.
2. Replace what you mean to replace, with something of similar kind and quality.
3. Keep each receipt, and send it to your adjuster with the line on their schedule it replaces.
4. Check each payment against the amount held back on that line, and ask about any that are short.

Our guide to recoverable depreciation covers each step, what counts as a replacement, and what happens if you decide not to replace something.

Is replacement cost coverage worth it?

The extra premium for replacement cost on belongings is often modest next to the gap it can close, but that depends on your policy, your insurer and what you own. Ask your agent for a price both ways, then compare the difference with the depreciation you would lose on the things in your home.

It tends to matter most when your belongings would be expensive to buy again: a houseful of furniture, a lot of electronics, a good wardrobe. One catch to weigh: on most replacement cost policies you buy the replacement first and are paid the held-back amount after, so you need to be able to cover that gap for a while.

What lowers the payment under either kind of policy?

• Your deductible, which comes off the settlement before anything is paid.
• Your contents limit, the most the policy pays for belongings in total.
• Lines priced too low: the wrong model, a cheaper stand-in, or a quantity of one where you owned several.
• An age recorded as older than the item really was, which raises the depreciation on that line.

The first two are set by your policy. The last two are mistakes on a schedule, and they are worth checking line by line whichever kind of coverage you have.

Where Indemnia helps

Indemnia works out replacement cost, depreciation and actual cash value for every item you own, from the receipts in your email and the photos you take of each room. On a claim, it shows how much is held back on each line of your insurer's schedule and what replacing each item would get back.