When people have an unfortunate situation where they have to make a home insurance claim, whether because of fire, or flood, or wind, or some other insured peril, they first try to limit any further loss if possible. Then the adjusters come to assess the damage to the home. This of course can be a very stressful time. Once the initial process is completed it’s time to take stock of all your possessions, what’s damaged and destroyed, what’s missing; essentially, what will need replacing.
Related Read: Home Inventory Sheets for All Your Possessions
What Options for Replacing Your Possessions do You Have?
Insurance companies typically use two different kinds of calculations to determine how much an insured will receive when they make a home insurance claim. These are Replacement Cost and Actual Cash Value. You could see a large difference between the two in terms of what an insurance company will pay out. Let’s examine both.
Actual Cash Value
What is an item worth? If you take belonging of yours, say a television set, how much could you get for it if you sold it on a classifieds website? That is what Actual Cash Value is. Take the original price you pay for an item, bring in depreciation and the physical condition the item was in on the day of the loss and you have the current value of that item. Depreciation is a natural decrease in an item’s value over time due to wear and tear and insurance companies have many tables that show an item’s value over time and which are consulted to determine payouts.
Replacement cost is just that, how much it will cost you to replace an item with a new product of like kind and quality. Having your list of items handy means you can present it to your insurance company with the desire to replace with new items of similar quality. The insurance company can then opt to research the items, or reimburse you when you present receipts of replacement items.
Important Tip: not all property insurance policies have the option of replacement cost. Make sure you know which kind of home insurance policy you have. If you want a second opinion on your home insurance visit us here.
Here’s an Example Detailing the Difference Between Actual Cash Value and Replacement Cost
Take that television set we mentioned earlier. Imagine you paid $1,000 for it after taxes, brand new in 2014. After a claim an adjuster deems the television to be un-repairable and that you’ll have to get it replaced.
With Actual Cash Value you’ll be reimbursed for a 4 year old television set in the same condition as your old set before it was destroyed. You might expect to receive $200. You would also get the Actual Cash Value if you opted not to replace an item.
With Replacement Cost you’ll be reimbursed for the value of a new television set of a similar kind and quality to the one that was destroyed. You may be able to purchase a new TV for around $1,000 including tax. However, one thing to note is the cost of televisions constantly comes down as new technologies are research. So, you would get a similar television as the one destroyed, but the cost could be only $600 including tax.
Knowing which kind of settlement costs you can claim, Actual Cash Value or Replacement Cost, is important. If you have questions one of our home insurance experts can help make sure you know what your options are.
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