There are several different methods by which your
insurance company may calculate the amount it will pay you for a loss. Payment
based on the replacement cost of damaged or stolen property is usually the
most favorable figure from your point of view, because it compensates you for
the actual cost of replacing property. If your camera is stolen, a replacement
cost policy will reimburse you the full cost of replacing it with a new camera
of like kind. The insurer will not take into consideration the fact that you
ran three rolls of film through the camera every day for the last two years,
causing a considerable amount of wear and tear.
In contrast, actual cash value (ACV), also known as
market value, is the standard that insurance companies arguably prefer when
reimbursing policyholders for their losses. Actual cash value is equal to the
replacement cost minus any depreciation (ACV = replacement cost -
depreciation). It represents the dollar amount you could expect to receive for
the item if you sold it in the marketplace. The insurance company determines
the depreciation based on a combination of objective criteria (using a formula
that takes into account the category and age of the property) and subjective
assessment (the insurance adjuster's visual observations of the property or a
photograph of it). In the case of the stolen camera, the insurance company
would deduct from its replacement cost an amount for all the wear and tear it
endured prior to the time it was stolen.
Does "Replacement Cost" Mean?
The term "replacement cost" is defined or explained in the policy. Simply
stated, it means the cost to replace the property on the same premises with
other property of comparable material and quality used for the same purpose.
This applies unless the limit of insurance or the cost actually spent to
repair or replace the damaged property is less. Refer to your policy for the
exact definition and explanation of replacement cost.
What is "Actual Cash Value"?
The term "actual cash value" is not as easily defined. Some courts have
interpreted the term to mean "fair market value," which is the amount a buyer
would pay a seller if neither were under undue time constraints. Most courts,
however, have upheld the insurance industry's traditional definition: the cost
to replace with new property of like kind and quality, less depreciation.
Courts have varied in their rulings as to whether or not depreciation includes
obsolescence (loss of usefulness as a result of outmoded design, construction,
So What's the Difference?
The only difference between replacement cost and actual cash value is a
deduction for depreciation. However, both are based on the cost today to
replace the damaged property with new property.
What About "Book" Value?
Note that accounting or "book" value has no relevance to either of the
previous methods of valuation. The depreciation rate reflected in "book" value
would yield a terribly inadequate settlement. Another problem with using
"book" value is that it may reflect only the items that are "capitalized." To
determine adequate limits, one must add "expensed" items into capitalized
Other Kinds of Valuation
Certain property may be subject to a special valuation basis other than
replacement cost or actual cash value. The value reported should match the
applicable valuation basis. For example, if the property policy is endorsed
with a selling price endorsement for finished goods, the proper value to
insure for finished goods is the cash selling price, less any customary
discounts and expenses that otherwise would be incurred.