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Actual Cash Value vs. Replacement Cost

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Alex Dopazo

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As a business owner, there is nothing more frustrating than not having enough resources to replace your property after experiencing a loss. In order to make sure your policy is structured properly, it’s important to understand the difference between Actual Cash Value and Replacement Cost so you can determine how much an insurer will give you should you experience a loss. 

Replacement Cost

As you may expect, replacement cost is the cost to repair or replace an item. Items can include buildings, stock, furniture- essentially anything that is insured on your policy as property. 

Replacement cost doesn’t solely cover the amount it costs to repair or replace an option. Some insurers may provide you with the option to opt for a literal replacement of what was damaged. This is something to keep in mind if you experience a loss of stock. 

Actual Cash Value

Actual Cash Value (ACV) is the replacement cost minus depreciation. 

ACV = Replacement Cost – Depreciation 

Depreciation removes value from a used item due to its age or level of use. For example, think of a brand new car. The moment you drive it off the lot, the value of that car immediately drops. The difference in value is the depreciation. 

After picturing the depreciation that comes from driving a new car off the lot, consider a 20 year-old roof on a building. It shouldn’t be a surprise that insurers won’t give you enough to build or replace that roof. They will only provide you with the remaining value of the original structure. 

Getting Back in Business

In order to get back in business, make sure your policy includes replacement value. If you’re solely depending on ACV, your policy won’t provide you with enough resources to replace what was lost, meaning you’ll have to use your own funds to rebuild. 

Paying more now will save you the heartache in the future. Investing in replacement value allows you to anticipate monthly costs in the present so you don’t have to plan for expensive losses in the future. 

Reach out to a trusted insurance advisor to create a Commercial Property policy that’s tailored to you today!

About Blog Author


Alex Dopazo

In 1998, Alex Dopazo, joined his father at the agency and fell in love with insurance. It sounds corny, yes, but we love insurance and how it can help our customers. Together we share that love with all of our customers who eventually become friends.

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