What is replacement cost coverage for homeowners insurance

When you file a homeowners insurance claim for a covered loss, the amount you’re reimbursed depends on your coverage limits and whether you have replacement cost or actual cash value coverage.

Actual cash value coverage pays to repair or replace your home or property — minus depreciation, or wear and tear. Meanwhile, replacement cost coverage pays to repair or rebuild your property at today’s prices.

If you have replacement cost coverage, many insurers will issue you two checks: One for the actual cash value of repairing your property, and one for the recoverable depreciation of your property. This is essentially the amount your home or property has depreciated since you first bought it.

Key takeaways

• After a covered loss, replacement cost value pays to replace your property with property of similar type and quality at current pricing.

• Actual cash value pays to replace your property at its replacement value minus depreciation. This means the cost of age or wear and tear is subtracted from the claim reimbursement.

• Recoverable depreciation is the difference between the replacement cost and actual cash value of your property.

• While actual cash value is cheaper, it provides less coverage than replacement cost coverage. 

• Many insurers pay out replacement cost value claims with two checks: One for the actual cash value of your property and one for the recoverable depreciation.

• A basic homeowners insurance policy comes with actual cash value personal property coverage and replacement cost value dwelling coverage. However, most insurers offer an optional replacement cost upgrade to your personal property coverage for an extra cost.

Recoverable depreciation vs. actual cash value vs. replacement cost value

Here’s how these three home insurance concepts compare:

What is actual cash value?

If you have actual cash value (ACV) coverage, your homeowners insurance will pay to repair or replace your damaged property only after deducting depreciation from the total damage or loss amount. That means if a fire damages your 6-year-old sofa, the amount you’re reimbursed is the cost of a new, similar sofa minus six years of wear and tear or depreciation. 

How is actual cash value calculated?

To determine an item’s ACV after a loss, insurance companies calculate the following: 

1. The amount it would cost to replace your damaged or stolen property with something similar today. This is also known as its replacement cost.

2. Subtracting depreciation from the property’s replacement cost.

Depreciation is calculated based on an item’s lifespan, or how many total years of value it has. If your 6-year-old sofa had a lifespan of 12 years, then the ACV payout would only be for half of the sofa’s original cost.

Actual cash value personal property coverage comes standard on most policies

Most standard homeowners insurance policies provide actual cash value personal property coverage by default. That means your furniture, electronics, appliances, and anything you consider your “stuff” are all covered at their depreciated value in the event of a loss. However, most insurers will let you upgrade to replacement cost value personal property coverage for an extra cost.

If you have replacement cost value (RCV) coverage, your homeowners policy will pay to replace your damaged or stolen property with new property of similar type and quality — without deducting for depreciation. That means if your 5-year-old laptop is stolen, your homeowners insurance will reimburse you for the value of a new, similar laptop at today’s prices. 

While a standard home insurance policy comes with actual cash value personal property coverage, the structure of your home is automatically covered at its replacement cost. That means if a portion of your home’s cedar wood siding is damaged by a covered loss, homeowners insurance will pay for new cedar wood siding — not vinyl or a cheaper material.

Check with your insurer to see how your roof is covered

If your roof is older than 15 years old or has visible cosmetic wear and tear, your insurance company may only agree to cover it at its actual cash value. Depending on your insurance company, you may be able to add a replacement cost roof add-on to your policy for an extra cost. Otherwise, you may need to repair or replace your roof to be eligible for replacement cost coverage.

What is recoverable depreciation?

Recoverable depreciation is the difference between the replacement cost of your property — i.e. the full cost to repair or rebuild something at today’s prices — and the actual cash value of your property — i.e. the cost of replacement minus the years of wear and tear.

You might see the term recoverable depreciation used in your homeowners insurance policy if you have replacement cost value coverage. This is because some insurers will issue two different checks when paying out a claim: One for the actual cash value of your property, and another for the recoverable depreciation of your property.

ACV vs. RCV: Which is better?

Generally speaking, replacement cost is a superior form of coverage. RCV provides a larger claim reimbursement since it include recoverable depreciation, while actual cash value coverage will leave you paying more out of pocket on a loss. If you can afford it, go with replacement cost personal property coverage.

But if you don’t own that much stuff, or the belongings you do own are relatively new and still under warranty, then the short-term policy savings of going with ACV coverage may be worth it. 

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