Homeowners insurance can compensate you if your property is damaged or stolen, but it’s important to be familiar with the language insurers use. Many homeowners don’t fully understand the coverage they have and are surprised when they file a claim and receive much less than they expected.
What’s the Difference Between Replacement Cost and Actual Cash Value?
If a homeowners insurance policy covers replacement cost, that means the insurer will give the homeowner enough money to replace an item that was damaged or stolen with a new one of the same model, or one close to it if the original model is unavailable. It doesn’t matter if the person owned the item for years and it had experienced significant wear and tear.
If a policy covers actual cash value, it will pay the amount it would cost to replace the item with a new one, minus depreciation, which is calculated based on the age of the item, how much wear and tear it had experienced prior to being damaged or stolen, and whether it is obsolete. Some courts have interpreted “actual cash value” as the amount a person would be likely to receive if he or she sold the item.
Why Does This Matter?
Replacement cost coverage will restore you to the position you were in before your belongings were damaged or stolen, but actual cash value coverage won’t give you enough money to replace lost property. That can put you in a difficult position, especially if your home was damaged by a storm or fire and you need to replace many expensive belongings. You might have to dip into your savings, use credit cards, borrow money, buy cheaper items of lesser quality or put off replacing things.
What If You Lose Something That Can’t Be Replaced?
In some cases, you won’t be able to replace a lost item with an identical one. When it comes to electronics, for example, technology is constantly improving. If the laptop you bought a few years ago is not on the market anymore, you’ll have to replace it with one that’s similar and that the insurance company agrees is equivalent to the one you lost.
If you have unique items that can’t be replaced, such as artwork or antiques, discuss them with your insurance company before you need to file a claim. You may have to get the items appraised and pay for a separate rider or floater to compensate you if those items are stolen or destroyed.
Choose the Right Insurance Policy
If you own a house, homeowners insurance is a necessity, but make sure you understand what you’re buying. A policy that covers the actual cash value of lost items may have lower premiums, but it can leave you in a tough spot if you lose many expensive belongings and only receive a fraction of the money you need to replace them. Discuss the details before purchasing a policy, and contact your insurer if you have questions about existing coverage.
This article is intended for informational purposes only and should not be construed as professional or legal advice.
