How a claim is paid often matters more than the limit on the page. The two main settlement methods are replacement cost (RC) and actual cash value (ACV), and the difference is depreciation.
Replacement cost
Pays what it costs today to replace the damaged property with new property of like kind and quality, without subtracting for age or wear. A ten-year-old roof destroyed by a storm is paid as a new roof.
Actual cash value
Pays replacement cost minus depreciation for age and condition. That same ten-year-old roof is paid at its depreciated value — often far less than a new one — leaving the homeowner to cover the gap.
Where it applies
- Dwelling: most homeowners policies insure the structure on a replacement-cost basis, which is what you want. Watch for roofs, which some carriers now settle at ACV based on age.
- Contents: personal property can be written either way. RC on contents is an upgrade worth having — it's the difference between getting a new TV and getting the depreciated value of a five-year-old one.
A common claim mechanic
On replacement-cost contents, insurers often pay ACV first, then release the rest once you actually replace the item and submit receipts. Clients should know to follow through to collect the full amount.
Educational only — confirm against the actual policy and your carrier's guidelines.