Replacement Cost And Actual Cash Value In Canada

So…what’s the difference between replacement cost and actual cash value in Canada?

Details matter. The most important thing that you want from your insurance policy is peace of mind. You need to know that when a worst-case situation actually happens, your commercial property policy will respond. This is why it’s vitally important that you know what the terms and conditions of your property policy mean. And it’s why we write posts like this to help you understand common insurance terms like replacement cost and actual cash value. Taking time to know what matters most to your business is something our commercial insurance brokers excel at. If you are wondering what the difference is between your insured replacement cost and the actual cash value, you’ll find valuable insights below.

1 + 1 = ? Replacement cost & actual cash value…

Is your math right? When you are about to report a claim, you are likely doing a quick calculation in your head. As you inspect the damage to your insured property, you are also likely holding a copy of your insurance policy in your hands. Insurance companies use very specific words to describe what’s insured, what endorsements are included and what’s not insured. And that’s just the tip of the iceberg when it comes to insurance terminology.

For this reason and more that’s why we take time to explain exactly how your coverage aligns with your risks. When disaster strikes, you’ll know what the replacement cost and actual cash value listed in your polic(ies) mean. Most importantly, you’ll know that your coverage is aligned to respond the moment it’s needed.

So…here’s what actual cash value means…

Your actual cash value is a term that’s commonly found in property and auto physical damage insurance. Actual cash value is, in fact, one of several possible methods of establishing the value of insured property to determine the amount that your insurance company will pay in the event of loss.

There are three ways that actual cost value is calculated. Your insurer will determine the actual cost value of your insured property or auto using one of the following:

1. The damaged property’s “fair market value”.
2. The cost to repair or replace the damaged property, minus depreciation.
3. Or using the “Broad Evidence Rule”. This calls for considering all relevant evidence of the damaged property’s value.

Ok, so now you are likely wondering what a Broad Evidence Rule means. A Broad Evidence Rule is a valuation rule that’s evolved in some areas. This means that a Broad Evidence Rule does not adhere to the principle that the traditional measure of actual cash value is the sole and only measure of value at the time of loss.

In fact, a Broad Evidence Rule is essentially broad in scope. The rule provides for the examination of every standard of value that has a bearing on the property that’s under consideration. This can include things such as:

• The property’s tax value
• The age of the property, and
• The profit likely to accrue on the property

Ultimately, a Broad Evidence Rule calls for the selection of a specific “value,” which, in the event of a total loss, will provide complete indemnification and no more.¹

Related Matters: What’s a statement of values used for?

…and what replacement cost means…

When you see a replacement cost listed on your property insurance policy, you should know that it has a different meaning in insurance-speak. Replacement cost refers to one of the two primary valuation methods for establishing an insured property’s value when determining the amount the insurer will pay in the event of loss.

You’ll note in your policy that it’s usually defined as the cost to replace the damaged property with materials of:

• Like kind,
• Like quality, and
• Without any depreciation deduction.²

We know that details matter and that’s why our brokers help you understand key insurance terminology such as actual cash value and replacement cost. When your business and commercial insurance are ALIGNED, you’ll know that you’ll be covered when a worst-case scenario happens.

Source: ^1,2 ALIGNED Insurance: Replacement Cost vs Actual Cash Value