As a policyholder, there are certain things about insurance coverage that you must be aware of. Numerous terms and languages that are a part of any insurance policy should be familiar to you in order to fully understand the overall insurance process.
When a policyholder files a claim, the damages he/she has suffered is accounted for and inspected by a claims adjuster who assesses them and prepares an estimation report. This report includes the details of the damages and lists out all the material properties that need to be replaced or repaired. This is where RCV, ACV, and depreciation come into play:
Property or any item that is insured has a certain value which depreciates over time due to natural wear and tear. This loss of value due to deterioration of the condition of a property or an item is what is known as depreciation.
Actual Cash Value: (ACV)
The term actual cash value refers to the amount of money that will be required to replace an insured property or an item while accounting for its depreciation as well. For instance, let’s assume you bought a car 2 years ago which you also insured. The actual cash value for your car would include the depreciated amount as well which would be calculated based on the wear and tear of your car throughout those 2 years. In case your car suffers from any damages, the actual cash value will not restore it back to its original condition but will help take care of the damages it has suffered.
Replacement Cost Value: (RCV)
The replacement cost value is the cost to replace an insured property or an item back to its original condition. Replacement cost value does not account for depreciation and the insurance coverage will not subtract money based on age or wear and tear of the insured item. For instance, if your house is completely destroyed, the replacement cost value will restore it to its original condition. Even if the original house had signs of wear and tear, replacement cost value will not account for that.
In short, the actual cash value is basically the replacement cost minus the depreciation. An excellent claims adjusters will always calculate the estimation and settlement amount based on the magnitude of the damages you have suffered. It will determine whether ACV trumps RCV or the other way round.