Actual Cash Value vs. Replacement Cost – Do You Know the Difference?

By the Mercury Team

Forty percent of homeowners are not aware of what their home insurance policy actually covers, and almost one in five policyholders believe they don’t have enough insurance to repair or replace damaged or stolen property, according to a national study Mercury conducted in 2018. One specific area of confusion is the difference between “Actual Cash Value” and “Replacement Cost.”

Why is this important? Consider if your 65-in. Smart Ultra HD TV is stolen. Would your insurance company give you a settlement to replace your TV with a new one of like kind and quality, or what your TV is currently worth today after being used? The answer:  It depends on the coverage you selected when purchasing your homeowners insurance policy.

Here’s a brief explanation of the difference between the two coverages and how you might be reimbursed for a covered property loss.

Actual Cash Value – When a homeowner has actual cash value coverage to repair or replace damaged, stolen or destroyed personal property, their insurance company will pay to replace the item with like kind and quality less age and condition depreciation.

“Actual cash value is basically what it sounds like – it’s what your personal property is worth at the time of your loss, so the cost to repair or replace the property less depreciation,” said Mercury Vice President of Property Claims Bonnie Lee. “Depreciation rates vary depending on the type, age, and condition of property, but you can rest assured that we do our best to make sure our customers are properly compensated so they can resume their regular lifestyle as quickly as possible.”

Insurance Tip: Lee recommends homeowners keep an inventory of their belongings, along with copies, scans or photos of your receipts if you have an actual cash value policy.

Replacement Cost – When a homeowner purchases replacement cost coverage, an insurance company will pay to repair or replace damaged, stolen or destroyed personal property with like kind and quality at today’s prices. The policyholder has the opportunity to recover any withheld depreciation up to the replacement cost amount once the property is replaced.  

So why should you purchase replacement cost coverage?

“Chances are you might not be able to find the exact model of a TV that was purchased two years ago. With Replacement Cost coverage, you’ll be able to replace your old television with a newer model without having to absorb the cost of two years’ usage,” said Lee.

Insurance Tip: Lee recommends homeowners insurance policyholders review their coverage with their insurance agent annually.

“Our agents are diligent about explaining the ins and outs of insurance policies to customers, but homeowners should reach out to their agent to assess their coverage before a loss happens. One simple phone call could end up saving you thousands of dollars, especially if you’ve acquired new belongings or made home renovations,” said Lee.