Man signing a homeowners insurance claims.

Actual Cash Value and Replacement Costs in Homeowners’ Insurance Claims

Homeowners’ insurance protects you from the unexpected. It’s not meant to be a windfall if a covered event occurs; rather, insurance makes you whole by compensating you for the loss. In exchange for timely paying your insurance premiums, your insurer agrees to pay out lump sum amounts to compensate you for unexpected events resulting in significant damage and costs. 

As insurers are required to compensate you for covered losses, they will draft their policies in a manner that excludes as many events and as much damage as possible. For example, although flood damage is literally damage due to water, flood damage isn’t considered “water damage” in most homeowners’ insurance policies. Instead, you need to purchase a second insurance policy that is specific to flood damage. If an event covered by your homeowners’ insurance policy occurs resulting in loss, the insurer will estimate the loss based on either actual cash value or replacement costs. The methodology that they use to calculate the amount they’re required to pay will be expressly identified in your policy.

Generally, policies calculating payments based on replacement value cost more than policies using actual cash value for payment calculations. This is because replacement value policies most often result in higher payouts from the insurer. Replacement value means the cost to replace something. Comparatively, actual cash value means the value of the item at the time of loss. Consider the below scenario:

An event occurs that is covered by your homeowners’ insurance policy that results in damage to your TV. Your TV was purchased brand new for $500 four years ago. However, due to the passing of time (depreciation), your TV is now worth $100. Under an actual cash value policy, you would receive $100 for the loss; however, your TV would be replaced with a comparable TV under a replacement costs policy. Thus, the difference in compensation would be approximately $400 between the actual cash value calculation of $100 and the replacement costs of $500. 

Fighting over a few hundred dollars for your TV may not seem too important to you, but consider that this calculation is applied across your policy. If your home suffers irreparable damage from an event such as a fire, the replacement costs policy would cover the costs to rebuild the home. Under an actual cash value policy, the amount paid would be the value of the home minus depreciation, which in many cases results in receiving far less than the cost to rebuild or buy a similar home. Don’t wait for a major event to find out which policy you have – contact an experienced insurance lawyer to make sure you have the protection that you need. 

Insurance Claims Lawyer in Rhode Island, Massachusetts and Connecticut

At PALUMBO LAW, we ensure that insurance companies don’t put profits over policyholders. Over our many years of practice, we have seen how insurance providers deny, delay or underpay insurance claims merely to protect their profits. We hold them accountable to ensure that you receive the compensation that you’re entitled to. If you have questions relating to your homeowners’ insurance or a claim in Rhode Island, Massachusetts or Connecticut, please contact our office today to schedule a consultation.