Be Aware of What Your Insurance Policy Covers: Depreciation vs Replacement

January 20, 2023

What does home insurance cover? Insurance policies for dwellings are designed to pay a resident for what is caused by a covered event. Dwellings can include homes, rental properties, and condos. When a claim is filed, the insurance company will evaluate the claim and the damage to determine if you should be reimbursed for actual cash value or replacement cost value. These are two very different types of reimbursement, so it is essential for people to understand the differences so that they are educated on how their insurance policies work.

This quick guide will provide information on home depreciation versus replacement value. These are important pieces of information to have when you are trying to understand home insurance coverage.

Understanding Actual Cash Value Coverage

The term Actual Cash Value or ACV refers to a type of coverage that factors in deprecation and normal wear and tear when evaluating a claim. This often applies to personal property that is covered in an insurance policy. An example might be a piece of furniture you purchased for $1,000 five years ago. The bed was ruined by a house fire. In most cases, you will not be reimbursed for the whole purchase price. You would only receive the current value of the five-year-old bed.

This can make a big difference when you consider that following a house fire, you may need to replace all of your furniture. If you are only being reimbursed a fraction of what you spent on your furniture, you will be obligated to put more money out of pocket into replacement furniture, or only be limited to purchasing older, used items.

The amount you ultimately get reimbursed can also be affected by the coverage limits of the policy and deductible amounts.

Understanding Replacement Cost Value Coverage

Replacement Cost Value coverage does not consider the depreciated value of an item. It also does not take into consideration the wear and tear of an item either. Instead, this type of coverage will reimburse you the amount of money it would take to replace, repair, or rebuild your lost property by today’s prices.

The coverage limits and deductibles will affect the amount you are ultimately reimbursed, but this is often a much more practical type of coverage as it provides you with a more realistic reimbursement that can help you replace your lost property following a claim event.

Guaranteed Replacement Cost Coverage

Another option is Guaranteed Replacement Cost Coverage. With this type of coverage, a homeowner is reimbursed for the actual price of rebuilding or replacing the property. This amount will be based on estimates in today’s market.


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