Replacement cost and actual cash value in a home policy

When a covered loss is paid, the policy uses one of two measures. Replacement cost pays to repair or replace your house and belongings at current prices. Actual cash value pays replacement cost minus depreciation. On a new item the two are close. On a roof or a sofa that is ten years old, they can be thousands of dollars apart.

What replacement cost pays

Replacement cost is the amount it would take to replace or rebuild your home or repair the damage. Nothing comes off for the item's age or wear. If a storm tears off a roof, a replacement cost policy pays toward a new roof at today's price, less your deductible.

What actual cash value pays

Actual cash value starts from the same replacement price and takes off depreciation, the value an item loses as it ages and wears. The older the item, the bigger the deduction.

Ask your insurer or agent which basis your coverage uses.

The house and the belongings can differ

A policy can pay for the house on one basis and your belongings on another. The declarations page and the loss settlement section of the policy say which. Read them again each year at renewal.

The roof example, worked through

Say you put on a new roof 10 years ago, and a new roof costs $10,000 today. Your deductible is $2,000.

• Under replacement cost, the insurer pays $8,000, the $10,000 price less the deductible.
• Under actual cash value, the 10-year-old roof might be worth $7,000 after depreciation. The insurer pays $5,000, the $7,000 less the deductible.

On that one roof, the two payments differ by $3,000.

An annotated example

What to do next

Open your declarations page and the loss settlement section of the policy. Find the basis for the house and the basis for your belongings, and note any item that is listed separately. If the wording is unclear, ask your insurer or agent which basis applies to each. Keep receipts for big purchases with your home inventory, so the replacement price of each item is on paper.