In the event of a covered loss, the insurance policy for your home will pay you either the replacement cost of the property that was lost or the actual cash value of the lost property. Somewhere in the policy description, usually the declarations page, will specify which method it uses. It is not uncommon for insurance companies to pay the replacement cost of some parts of the house, like the physical structure, and the actual cash value for other parts.
Actual Cash Value
The actual cash value of a piece of property is calculated as the replacement cost minus depreciation (normal wear and tear) of the product. Policies that pay actual cash value in losses are less expensive to purchase, as the payout is less than the replacement cost would be. In many jurisdictions, the actual cash value has been determined to be equal to the fair market value.
For instance, say your house is burglarized and the thieves make off with your electronic tablet. This tablet was new, state-of-the-art, and cost $750 when you purchased it four years earlier. If you were to sell the tablet today, it would not sell for nearly as much as you paid for it. Whatever someone would be reasonably expected to pay for the tablet, had it not been stolen, is roughly equivalent to the actual cash value.
Replacement Cost Value
To illustrate the replacement cost value, let’s return to the stolen tablet situation. If your insurance company were to use that method to replace your tablet, then it would use a value equal to buying a comparable tablet new or like-new today. Figuring out the replacement cost of certain items, like the tablet, is fairly easy.
When it comes to your house, though, things can get complicated, especially in the event of a total loss. The replacement cost of a burned home is not equal to the amount you paid for it, but rather the cost of materials that make up the house. The cost of homes is indicative of many factors, such as the location and age of the house.
Insurance policies that cost less per month are certainly attractive, but in the event of a total loss of something as valuable as your home, you might be wishing you had picked a different policy. Even then, it’s important to remember that insurance companies make money by paying out as little as possible in any situation. If you are trying to receive a payout for a loss covered by your home insurance, please contact The Monfiston Firm, P.A. so we can help you get what you deserve.