Actual Cash Value vs. Replacement Cost

The Importance of Correct Homeowner’s Insurance Coverage

When obtaining quotes for homeowners insurance, it is always wise to know what isn’t covered. A standard home owner’s insurance policy is written on an H03 special form. Without being endorsed, this form normally covers the dwelling, other structures, and personal property on an actual cash value basis. In most cases, though, it is advantageous to endorse the standard homeowner’s insurance policy to cover replacement cost- on both the home and the contents.

What is the distinction between real cash value and replacement cost?

Actual Cash Value

Actual cash value, also known as fair market value, is defined as the cost to replace an item minus the depreciation cost. For example, television was purchased for $1200 three years ago. Last week someone broke into the home and stole the television; since theft is a covered peril under the home owner’s insurance policy, the insurance adjuster offered the insured $900. This offer signified the item’s cost when it was purchased minus depreciation (wear and tear) for three years.

Replacement Cost

On the other hand, replacement cost is the current amount needed to rebuild a home or replace personal property, regardless of depreciation for wear and tear or age. In the previous scenario, if the homeowner’s insurance policy included the replacement cost endorsement, the insurance adjuster would have paid to replace the television with another of the same like, kind, and quality, regardless of the price, up to the limits of the policy.

Exceptions to the Replacement Cost Endorsement

Please be aware that the replacement charge endorsement is not meant to cover property appreciating furniture or collectibles. Also, normally it doesn’t apply to special coverage limits listed on the homeowner’s policy. Silver, jewelry, and firearms are examples of items with special coverage limits. Finally, this coverage only applies to property that has been kept in good working condition.

How to Know Whether There is Replacement Cost on a Current Policy?

Homeowner’s insurance policies are composed of many different coverages; therefore, they can be difficult to interpret. After reading through the policy, if it is still undeterminable whether there is replacement cost coverage, pick up the phone and contact the agent from which the homeowner’s policy was purchased. It should only take them a few minutes to find the information.


  • When purchasing homeowners’ insurance online or in-person, always ask if the policy pays out on an actual cash value basis or a replacement cost basis.
  • Take the time to review the policy thoroughly and ask any questions.
  • Shop around for quotes but don’t decide based on price alone. Consider the company’s history, how claims are settled, and how comfortable the homeowner is with the agent.

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