What does Actual Cash Value and Replacement Cost Coverage mean?
Actual Cash Value
Actual cash value is the replacement cost of your property less depreciation.
If your policy provides for actual cash value, the insurance company will only pay the depreciated value of what was damaged. This type of policy will typically leave the homeowner in a difficult position because the insurance proceeds are not enough to replace that which was damaged or lost.
Replacement Cost Coverage
Replacement cost means that the insurance company is required to pay for the replacement or complete repair of what was lost or damaged.
When your policy calls for replacement cost coverage, your insurance company is required to pay the full cost to replace the damaged part of your home. However, what typically occurs is that the insurance company will estimate the replacement cost but only initially pay the actual cash value. Then once you actually replace or repair that which was damaged then they will pay the difference between the replacement cost and the actual cash value.
Other things to keep in mind about your insurance coverage
Your insurance policy does not cover the market value of your home. Meaning the sales value of your home is not taken into consideration when trying to determine the actual value of your loss or the replacement cost. Also, your insurance policy does not cover the value of your land. This is important to keep in mind if you live on the coast and your property line is subject to erosion.
With respect to personal property (i.e. furniture, televisions, clothes, etc.), most policies only cover the actual cash value of what was damaged or lost. However, double check your policy because a lot of families purchase additional coverage that provides for replacement cost of personal property.
If you lost artwork or jewelry, most policies will only provide limited coverage for these types of items.