What's the difference between actual cash value and replacement cost? Also know by the acronyms ACV and RC, these property insurance terms refer to how an insurance company determines what it owes in the event of a property claim.
Actual cash value is equal to replacement cost minus depreciation, or the cost of the item when purchased minus depreciation. However, courts have sometimes disagreed on the meaning of "actual cash value" and have argued that it can mean “fair market value”. However, the majority of times, the meaning is replacement value minus depreciation. If you have a property claim with an ACV policy, you may only receive a fraction of the initial value of the item that was lost. This is why ACV property policies are less expensive than replacement cost property policies.
Replacement cost is simply the cost to replace or repair an item as new. In a replacement cost property policy, insurers and the insured agree on the value of a piece of property ahead of time. Replacement cost can be the cost to repair or replace the item with equivalent or like-kind quality. Replacement cost policies are more expensive than actual cash value policies because the value of the items that are insured are agreed upon at the time the insurance is placed.
If you have a RC property policy you should check on the value of the property on an annual basis in case the property has gone up or down in value so you can adjust your policy as needed. Both the insurance company and the insured agree what the value will be to replace the property… This means that you should check your policy every year to determine that the value you agreed on is still accurate.