Actual Cash Value or Replacement Cost? What it means for your homeowner's insurance

There are two ways in which the insured can be compensated for a loss caused by a covered peril: Replacement Cost or Actual Cash Value. But what does this mean when it comes to your homeowner’s insurance?

Replacement Cost means the coverage will pay for the cost of rebuilding, repairing, or replacing the damaged property using new materials, and current labor costs to bring the damaged property back to a like quality in the same location as it originally was created. The intent of replacement cost coverage is to restore the insured to the state they were prior to the loss.
The intent Actual Cash Value, on the other hand, it to restore the insured to their same economic or financial position prior to the loss. This policy pays the current market value of the depreciated property.
For example, if your roof cost $40,000 to build 8 years ago it could cost $50,000* to build the same roof today. Replacement Cost would pay $50,000 -minus your deductible - to rebuild the roof, and Actual Cash Value would only pay the depreciated value. Generally, a composition shingle roof is expected to last 25 years, which means it would depreciate 4% per year. An 8-year-old roof would then have a depreciated 32%. Thus, an Actual Cash Value policy would pay $27,200 – minus your deductible – towards replacing the roof. This is because the roof would have already suffered wear and tear and would have needed to be replaced – likely in another 17 years - if a loss had not occurred.
Should the insured decide not to rebuild their roof using materials of like kind and quality and in the same location then the policy would only pay the Actual Cash Value even if the insured has a Replacement Cost policy because the insured is deciding not to replace the roof.
It is important to note that in neither instance – whether replacement cost of actual cash value - will the policy pay out greater than the limits of liability.

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The contents of this video and the information included in it are not intended to serve as a substitute for consultation with an attorney. For legal issues, concerns, and questions please seek the advice of an appropriate legal professional.

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