Replacement Cost vs. Actual Cash Value

There are a lot of concerns by people about the meaning of “Replacement Cost” and “Actual Cash Value” in homeowners’ policies.

Almost all the homeowners’ polices that I have seen have the same wording about replacement cost.

Replacement costs mean that after a covered loss such as fire, windstorm, etc., the insurance company will pay what it cost to replace the damage if you are carrying at least 80% of the replacement value of the house. (If you are carrying less than 80%, then they will pay you actual cash value, which means the replacement cash less depreciation due to age or obsolescence.)

There are usually no disagreements when a loss is settled on a replacement cost basis but on an actual cash basis, the depreciation factor brings on nothing but arguments and stress. That’s why we always recommend that you carry 100% of the replacement cost so that the valuation troubles are not encountered after a loss.