What's the difference between replacement cost and actual cash value?

Replacement cost pays what it takes to repair or replace with materials of like kind and quality today. Actual cash value is replacement cost minus depreciation, so it pays less for older things.

Why did my insurer only pay part of my claim at first?

With replacement cost on your home, insurers commonly pay the actual cash value first and the rest as the repairs are done. Florida law sets this up for dwelling claims (Fla. Stat. 627.7011).

Does replacement cost apply to my roof?

Not always. Some policies pay roofs on an actual cash value basis or on a schedule by age, even when the rest of the house is replacement cost. Check your declarations page and endorsements.

Where do I see which one I have?

On your declarations page and in the policy's endorsements. Dwelling, personal property and roof can each be valued differently.

Replacement cost vs actual cash value — From Elona’s desk

Replacement cost pays what it would take to repair or replace something today with materials of like kind and quality, without taking anything off for age. Actual cash value pays replacement cost minus depreciation, so the older the thing, the less you get.

Both are real coverage. The difference shows up the day you file a claim, which is why it’s worth knowing which one you have before you need it.

A simple way to picture it

Think of a ten-year-old sofa that gets ruined in a covered loss.

Replacement cost pays toward a comparable new sofa.
Actual cash value pays what that ten-year-old sofa was worth, after wear and tear. That’s usually a lot less than a new one costs.

The same idea applies to your floors, your cabinets, your roof and the house itself.

How replacement cost usually pays out

Replacement cost doesn’t always arrive in one cheque. On a home claim, insurers commonly pay the actual cash value first, then pay the rest (the depreciation they held back) as the repairs are done.

That’s normal. It isn’t the insurer shortchanging you. But it does mean you should plan for the first payment to be smaller than the final bill, and keep every invoice.

The places it gets tricky

Your dwelling, your belongings and your roof can each be valued differently. Plenty of policies are replacement cost on the house but actual cash value on belongings, or pay the roof on actual cash value or a schedule based on its age.
Endorsements change the rules. The front page might say “replacement cost,” and an endorsement further in might limit it for certain parts of the house.
You need enough coverage to rebuild. Replacement cost works best when your dwelling limit reflects what it would really cost to rebuild today. Building costs change, so look at it at every renewal.

Here’s how the rules differ by state.

Florida

In Florida

Florida law sets out how this works for homeowners policies (Fla. Stat. 627.7011):

It has to be offered. Before issuing a homeowners policy, an insurer must offer replacement cost coverage, and remind you that it’s available at least once every three years.
Dwelling claims. With replacement cost, the insurer must first pay at least the actual cash value, less your deductible, then pay the rest as the work is done.
Total loss. If the home is a total loss, the insurer must pay replacement cost without holding back depreciation.
Belongings. Insurers must offer full replacement cost on personal property. They may also offer a version that pays actual cash value first and the rest once you replace the item, but they have to tell you clearly before the policy starts, and they can’t make you pay for the replacement up front.

If your roof has its own deductible or payment rules, that’s covered in my post on roof age in Florida.

Illinois

In Illinois

The Illinois Department of Insurance describes the same two options, and how claims usually play out:

Replacement cost is the cost to repair or rebuild with similar materials, without deducting depreciation. Actual cash value is replacement cost minus depreciation, based on age and condition.
With replacement cost on the home, the insurer usually pays actual cash value first and the difference once repairs are finished. If you decide not to repair or rebuild, it generally owes only the actual cash value.
Belongings: the Department notes that most policies pay actual cash value on contents unless you’ve added replacement cost, which typically pays the rest after you buy the replacement and send receipts.
Roofs: it also warns that even with replacement cost, some policies limit what they’ll pay for certain surfaces, like roofs.

Good to know

Check your declarations page. It usually says how the dwelling and personal property are valued. Endorsements fill in the rest.
Keep a home inventory. Photos or a quick video of every room make a contents claim much easier, whichever valuation you have.
Keep your receipts after a claim. Replacement cost holdbacks are usually released on proof of repair or replacement.
Ask before you renew. If something about how you’re paid changed, it’ll be in the renewal paperwork. (Why renewals change.)

Want me to check which one you have?

Upload your declarations page at /quote/ or send it to me, and I’ll show you how your home, your belongings and your roof would each be paid, in plain words.

Talk to Elona