Understanding the words and terms used in insurance policies is important when purchasing insurance and very important at the moment of presenting a claim to an insurance company.
It is easier to understand the term REPLACEMENT COST than it is to understand the term ACTUAL CASH VALUE.
REPLACEMENT COST means just that, the cost to replace a given article regardless of its age or the price for which it was purchased. An apartment occupant purchases a new 52 inch plasma television set today. There is a fire in his building tonight. The television is destroyed. The insurance company should pay him the price that he paid for the television set regardless of whether the insurance policy is written on the basis of REPLACEMENT COST or on the basis of ACTUAL CASH VALUE.
In the above example, so little time elapsed between the purchase and the loss that there would normally be no difference between REPLACEMENT COST and ACTUAL CASH VALUE.
The concept of ACTUAL CASH VALUE is a bit more difficult to understand. Take as an example an insured who purchased a large screen, projection television 10 years ago. It cost him $3,000 at the time. It still serves him well. He is still happy with it. He has a fire today. If his renter’s policy is written on the basis of ACTUAL CASH VALUE, what will be the amount paid for loss of the set? What would the market value of such an item be? $300? $50? What is the expected useful lifetime of such an item? Ten years? Obviously, a settlement on the basis of ACTUAL CASH VALUE is going to be much less than a settlement on the basis of REPLACEMENT COST.
In general, ACTUAL CASH VALUE, means the value of the destroyed item at the time of loss. The value covered by the insurance policy is cash or monetary value. Other considerations, such as sentimental value, will not be taken into consideration.
A person acquiring renter’s insurance will generally be well advised to purchase coverage on the basis of REPLACEMENT COST if it is available at a modest price differential as compared to coverage on an ACTUAL CASH VALUE basis. He or she will be happier at the time of loss settlement.
There are issues which have not been considered here. Among the most important is the question of Scheduled Items. If the individual has items of considerable value, the possibility of specifically including a description of such items in the policy should be explored. A value for each such item can be listed in the policy. Proof as to its value may be required by the insurance company at time of policy issuance.
Finally, it is important to retain receipts of items purchased. They are very useful when dealing with insurance companies, police departments and others at moments of unexpected difficulties.