Replacement Cost vs. Actual Cash Value
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What is Replacement Cost?
Replacement cost is a property insurance term that refers to one of the two primary valuation methods for establishing the value of insured property for purposes of determining the amount the insurer will pay in the event of loss. It is usually defined in the policy as the cost to replace the damaged property with materials of like:
- Quality, and
- Without any deduction for depreciation.
What is Actual Cash Value?
Actual Cash Value (ACV) is in property and auto physical damage insurance, one of several possible methods of establishing the value of insured property to determine the amount the insurer will pay in the event of loss. ACV is typically calculated one of three ways:
- The cost to repair or replace the damaged property, minus depreciation,
- The damaged property’s “fair market value”,
- Using the “Broad Evidence Rule,” which calls for considering all relevant evidence of the value of the damaged property.
What is the Broad Evidence Rule?
The Broad Evidence Rule is a valuation rule that has evolved in some areas and does not adhere to the principle that the traditional measure of ACV as the sole measure of value at the time of loss. This rule provides for the examination of every standard of value having a bearing on the property under consideration, such as:
- Age of the property,
- The profit likely to accrue on the property, and
- Property’s tax value.
Ultimately, it calls for the selection of that “value,” which, in the event of a total loss, will provide complete indemnification and no more.
To learn more about how replacement cost and other valuations works contact an ALIGNED Insurance Advocate or connect with us at www.alignedinsuranceinc.com today.
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