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Defining Actual Cash Value Versus Replacement Cost
Posted 4/1/2019
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When experiencing a loss for an amount that is less than your coverage limit, an insurance carrier will typically use one of two methods to determine how much you will be paid. One of the most common methods used for this calculation is called Actual Cash Value (ACV). ACV is determined by taking the replacement value minus depreciation at the time of the loss. For example, if the flat screen TV you purchased five years ago was damaged or stolen while in storage, the amount the insurance carrier would pay might be fairly close to today's market value for a five year-old TV.

The second calculation is called Replacement Cost Value (RCV). RCV does not have a depreciation factor, but it usually comes with a maximum value. That means you would be paid whatever it costs to replace your flat screen TV with a comparable model at today's prices. This scenario is far less common.

Unless your policy specifically states that it will pay the replacement value, then it will only pay actual cash value. Coverage limits play a major role in what you will be paid after a loss. The value of your personal property is the main driver in the way your premium is calculated.

If you have an item of high value and you know the regular limits of your insurance policy will not come close to compensating you if it was lost or destroyed, you may be able to purchase additional coverage.

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