Understanding Actual Cash Value and Replacement Cost Settlements

Actual Cash Value or Replacement Cost Value? Many policyholders think that their insurance will cover the full expense of whatever it cost them to repair their property. Unfortunately, depending on the type of settlement method, this isn't always the case.

If you're unfamiliar with the nuances of an insurance policy, the terms "Actual Cash Value" or "Replacement Cost Value" might sound like a foreign language, but don't worry this article will help you make sense of these settlement methods so that you know what to expect.

How Are Insurance Claim Payouts Decided?

After you've properly filed a claim and if your claim has been approved, it's time for your insurer to pay you for the damage.

As part of the claims process, an evaluator may come to assess the cost of the damage to your property.

How much your insurer owes you is determined by the loss settlement method outlined in the policy that you've chosen.

Typically, these are: Actual Cash Value, Replacement Cost Value or Agreed Loss Settlement.

How Replacement Cost Value Settlement Works?

The most common settlement method on homeowners policies is replacement cost value coverage.

In a replacement cost value policy, the policyholder pays the cost of the damage - as determined by market value benchmarks - minus the amount of deductible owed by the policyholder.

For example, a family's home is damaged in a tornado. While a local repair company says that it will cost $10,000 to repair the damage, the standard market cost of the repair may only be $8,000. The insurance company will cover $8,000 minus the deductible in a replacement cost policy.

In this instance, it may be wise for the family to wait on making repairs until their insurer has given them a valuation to help avoid having to pay out of pocket if the repair company's estimate is higher than the settlement amount.

How Actual Cash Value Settlement Works?

In the same situation, a family with actual cash value coverage would receive a different payout.

In an actual cash value policy, the insurance company considers depreciation on the property covered. The insurer calculates the payout by taking the cost to replace an item and subtracting its depreciation.

In the scenario above, a family with an actual cash value policy would receive a payout of $8,000 minus the depreciation on the roof and minus the deductible.

Agreed Loss Settlement

The final type of settlement is an agreed loss settlement. Under agreed loss, the insurer and policyholder agree on a specific value for the insured item at the time the policy is written.

In the event of a total loss, the policyholder receives the full, predetermined amount.

However, total losses are rare, and it's more likely that an evaluator will still be needed to assess the extent of the damage - in which case damages will be paid by the cost to repair or replace the damaged property based on the amount you and the insurer agreed to originally, minus the deductible.

There is no one size-fits-all settlement method and it's likely that your policy or policies feature some blend of all the above. Understanding loss settlement methods and the terms used in your policy is a crucial step to making sure you have the coverage you want for your circumstances.

If you're exploring your coverage options, consider finding a Foremost^® Agent near you for personalized guidance or call us at 888-244-8092. Contact your insurance agent for loss settlement questions or other questions specific to your policy.

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