Replacement Cost vs. Actual Cash Value
When purchasing Homeowners insurance one of the most important coverages provided is for damage to your property; both the dwelling itself as well as all of your personal belongings. While this may be a primary concern for homeowners, many people do not fully understand how their property is valued by the insurance carrier and therefore, may not have sufficient coverage.
The primary property valuation coverage options offered on Homeowners insurance policies are Replacement Cost (RC) and Actual Cash Value (ACV).
Replacement Cost coverage pays the amount it will cost to replace damaged property (due to a covered cause of loss) with new comparable goods, despite the age or condition of the damaged property.
Actual Cash Value coverage means that your insurance carrier will factor in depreciation when calculating how much an item is worth today. Calculating the depreciated value of your home and belongings is a complex and lengthy process which you definitely do not want to have to do in the middle of a claim situation. Replacement Cost coverage is the preferred valuation and while it is included for your dwelling on most insurance policies, that is not the case for your belongings.
The standard Personal Property coverage included in most Homeowners policies is provided on an Actual Cash Value basis and must be endorsed to provide coverage on a Replacement Cost basis. This can be an important difference to consider when reviewing quote options.
Also, the Personal Property coverage limit is a percentage of the dwelling limit; generally between 50% and 70%. This amount can be increased so make sure you have sufficient coverage! This includes ALL your personal belongings from furniture, fixtures and appliances to clothing, jewelry, electronics, etc.
People often think they “don’t have that much to insure” but these items can add up quickly in the event of a serious loss. It’s a good idea to keep a video log of all your personal property so you don’t have to try to itemize everything after a loss.