Do you know how much your property is insured for? Most of us do not know the answer off the top of our heads, but we probably think we know where to look: at our insurance policy. (If you have a copy of your insurance policy, you are far ahead of most.) But a look at the insurance policy is likely to reveal more complexity than clarity.

“Loss settlement” provisions – that is, the provisions of the insurance policy that provides how payment will be made – differ significantly from policy to policy. It is therefore critically important to be familiar with the specific language of your policy. But there are two acronyms that make common appearances here: “ACV” (actual cash value) and “RCV” (replacement cost value). Knowing the differences between these two and their interplay may be the difference between tens or hundreds of thousands of dollars even on relatively modest claims.

Start with replacement cost value, which in most circumstances is going to be a larger number. RCV is the cost of repairing or replacing the damaged or destroyed property. For example, if a building is completely destroyed, the RCV will be the cost of rebuilding that same property. (Or, alternatively, of purchasing a replacement.) At the outset of any claim, you should determine whether your policy provides replacement cost benefits. Policies may have strict requirements in them to obtain replacement cost benefits, which you must also be aware of.

Cash and change on a counter top

While RCV is at least in theory straightforward, ACV is less intuitive. In the day-to-day business of the insurance industry, ACV is generally calculated by beginning with the RCV and then applying a depreciation adjustment. Think of a car here. Your car depreciates – that is, loses value – as it ages. So while it may cost $30,000 to buy a brand new car, because of depreciation your car may only be worth, say, $20,000. This would be the ACV.

Frequently, policies will provide that you are entitled to both ACV and RCV. How is this? The insurance company will first make the ACV payment and you will then be allowed to obtain the remaining amount in the RCV payment after repairing or replacing the product.

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