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The Difference Between Actual Cash Value and Replacement Cost Under Your Property Insurance Policy

You come home from work to find that a roof leak caused your bedroom ceiling to collapse. There is water everywhere, and your ten-year old king-size bed, including mattress and bedframe are ruined. Luckily, you have insurance.  But do you know what your insurance company is obligated to pay you under your policy for your damaged bed?

Property insurance policies, such as your homeowners’ insurance policy, generally contain two types of valuation provisions for damaged property. They are “Actual Cash Value” and “Replacement Cost”.

Actual Cash Value valuation pays the “actual cash value” of your damaged property, regardless of whether you actually replace or repair it. Depending upon your policy, “actual cash value” is defined either as i) the fair market value of the item, or ii) the Replacement Cost of the item minus depreciation based upon the age of the item that was damaged. Either way, Actual Cash Value roughly equates to what you could actually have sold that ten-year old king-size bed for in its undamaged condition.

On the other hand, Replacement Cost valuation pays you what it would cost you today to replace the damaged, ten-year old king-size bed with a brand-new king-size bed. The one caveat to Replacement Cost coverage is that to receive payment for the full Replacement Cost value, you have to actually replace the damaged item with a new one before you are entitled to receive the full Replacement Cost payment.  The insurance company will first pay you the Actual Cash Value (calculated as Replacement Cost minus depreciation). The difference in what they pay you and what you are entitled to is called the “holdback”. Once you establish that you replaced the damaged item with a new item, then the insurance company will pay you the holdback amount.

Replacement Cost is thus the preferred coverage to have. It will be more expensive than Actual Cash Value coverage, but you’ll be very happy you have Replacement Cost coverage if you ever need it.


Andrew D. Wyman, Esq. is the founder of Wyman Legal Solutions in Boca Raton, Florida, and holds a Martindale-Hubbell rating of “AV-Preeminent” for legal ability and ethical standards. An avid golfer, Andy resides in Boca Raton, Florida with his wife and two children. You can learn more about Andy at www.wymanlegalsolutions.com. Email Andy at [email protected] with any thoughts you would like to share concerning this blog post.

Palm Beach County: 561-655-2028
Martin County: 772-283-6839
Toll-Free: 1-877-LAW-LLLS

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