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Settlements—Actual Cash Value vs. Replacement Cost

Insurance is an essential fact of life that most adults have encountered as they have purchased homes, vehicles, or rental properties. While having an excellent insurance broker is a good place to start, it’s also important to investigate your options.

The terms “Actual cash value” and “replacement cost” aren’t necessarily interchangeable on insurance documents. These numbers can be very different when the time comes to collect the insurance amount.

Understanding Insurance Calculation Methods

Actual cash value refers to the amount that an item could be replaced for lest any deduction for depreciation at the time that it is destroyed. This is sometimes less than what homeowners expect due to the depreciation that occurs over time. The value is decided by comparing the item to others being sold in similar condition.

The replacement cost is the actual amount that would be needed to replace the items as if they were brand new. Before a policy holder can expect a final insurance payout, they will need to replace the items and provide documentation of the cost. This method can be more complicated, but generally covers more than actual cash value.

A final payout can depend on three different factors:

  • The type of policy
  • The items documented and covered by the policy, and
  • Whether the policy specifies that it covers “actual cash value” or “replacement cost”
  • Information Required for Full Compensation
  • To receive full compensation, you will need to compile a complete list of everything that was damaged or destroyed. This can include:

A meticulous, detailed description of each item, so keep receipts for expensive items when possible
Photos of the items taken by you or from the manufacturer
The amount that the item is sold for today, and
An accurate account of when you bought the item

To better understand what you might need to include, speak to your claims adjuster. Different insurance companies will have their own guidelines and specifications for documentation, and it can have a huge impact on the final compensation.

The Replacement Cost Claim Process
As we stated above, the replacement cost claim is not paid out all at once. The standard insurance payout involves an initial check for the cash value of the items. The final payment is not received until you have submitted proof that you have replaced the items that were lost. There are additional opportunities for compensation, but these will need to be discussed with your insurance agent.

Choosing the Best Insurance in Southern New Brunswick
There are plenty of ways that an insurance policy can be customized for your individual needs. Choosing whether to purchase a policy offering a cash value or replacement cost settlement will depend on your budget and the value of the items that need to be protected. However, no one should ever make an insurance decision without first consulting with an experienced insurance broker. While you pray that it never does, when the worst-case scenario happens, you want an insurance policy you can trust.

For more information on car insurance and home insurance in Southern NB, call Carnaghan Thorne Insurance at 506-634-1177 (Saint John) or 506-432-1900 (Sussex). You can also set up an appointment or discuss your insurance needs by filling out our convenient online contact form.