The two in one table

Actual cash value (ACV) Replacement cost (RCV)
What it pays The cost to repair or replace, minus depreciation The cost to repair or replace with like kind and quality
Depreciation Taken off for age and wear Not taken off
How it’s paid One payment The ACV first, then the depreciation once the work is done, where the policy requires the repair
Up to The policy limit, minus the deductible The policy limit, minus the deductible

The NAIC’s plain version: ACV coverage pays for the loss based on the property’s value given its age and wear, and often doesn’t pay enough to fully repair or replace it. Replacement cost isn’t the home’s market value either; market value includes the land and moves with the real estate market (NAIC).

How each is figured

California’s insurance code spells both out:

  • Actual cash value is the cost to repair, rebuild or replace, less a fair and reasonable deduction for physical depreciation based on the condition at the time of the loss, or the policy limit, whichever is less. Depreciation applies only to the parts of a structure that are normally repaired and replaced during its useful life (Cal. Ins. Code 2051(b)).
  • Replacement cost is the cost to repair, rebuild or replace, without a deduction for physical depreciation, or the policy limit, whichever is less (Cal. Ins. Code 2051.5(a)).

Other states write their own rules; the policy’s loss settlement section says which method applies to the house and which to its contents.

How depreciation is worked out

Travelers explains its method: depreciation comes from the item’s replacement cost and its life expectancy. A 25-year composition shingle roof loses 4% a year under normal conditions, so a roof that is 10 years old at the loss is depreciated 40%. The condition of the item can also change the figure.

A roof claim, worked both ways

Say the roof needs replacing, the contractor’s estimate for the replacement is $20,000, the roof is 10 years into a 25-year life, and the deductible is $2,000:

ACV policy RCV policy
Replacement cost $20,000 $20,000
Depreciation (10 years at 4%) $8,000 $8,000, held back at first
Deductible $2,000 $2,000
First check $10,000 $10,000
After the roof is replaced Nothing more $8,000, up to what was actually spent
You pay $10,000 $2,000

That’s how the Texas Department of Insurance describes the two checks: the first is the estimated cost of the repairs minus depreciation and the deductible, and the depreciation is paid once the insurer gets the bill for the finished job. Its own example is a $10,000 roof with a $2,000 deductible: $8,000 on a replacement cost policy, $5,000 on an actual cash value policy where the roof’s actual cash value is $7,000.

The recoverable depreciation guide covers how the held-back $8,000 is claimed and the deadlines for it, and the roof replacement cost guide shows what a replacement runs in your state.

Where the estimate comes in

Both methods start from the same number: what the repair costs today, item by item. That is the contractor’s estimate. When it lists each line with its measurement, the replacement cost is clear, the depreciation is figured against real items, and anything the insurer’s estimate left out shows up for a supplement.

Common questions

What is the difference between actual cash value and replacement cost?

ACV pays the cost to repair or replace minus depreciation; replacement cost pays it without the deduction (NAIC).

How is actual cash value calculated?

The cost to repair or replace, minus a deduction for physical depreciation based on the property’s condition at the loss (Cal. Ins. Code 2051(b)). Insurers such as Travelers figure the depreciation from the item’s age and life expectancy.

How do I know if I have ACV or RCV coverage?

The policy says, and the declarations page, its first page, sums up the coverages, limits and deductibles (Texas Department of Insurance). The NAIC suggests your agent, your insurer or your state’s department of insurance for help reading it.

Does replacement cost pay the full amount right away?

Not always. Where the policy requires the repair to collect full replacement cost, the insurer pays the ACV until the property is repaired or replaced, then pays the difference (Cal. Ins. Code 2051.5(a)(2)).