Alternate name: Replacement cost value, replacement cost coverageAcronym: RCV
In the event of a loss, insurers may use this method to determine the damaged property’s market value and how much it will cost to replace it entirely. You are not reimbursed for the depreciation of the old or damaged asset.
Example of Replacement Cost
If your house was damaged by a falling tree, depending on your homeowners insurance policy, your insurance company might offer replacement cost value (RCV) for your home. You would receive the money needed to restore the home to its previous condition, minus the deductible you must pay first. This RCV can also include the labor and material costs for debris removal, roof rebuilding, and attic repair. Suppose you have a 2,200-square-foot roof, and the average cost to replace a roof in your area is between $3.50 to $5.00 per square foot. Your deductible is $750. In that case, you could expect your insurance company to offer between $6,950 and $10,250. The math would be: Cost to replace roof - Insurance deductible = Amount paid by insurance Using the numbers from the above example, it would look like this: The RCV of tangible assets such as machinery, buildings, personal belongings, real estate, or vehicles is straightforward. However, determining the RCV of intangible assets such as patents, trade secrets, contracts, or trademarks is more complicated. Taking the previous example, the insurance appraiser would multiply your neighborhood’s average rebuilding costs per square foot by your home’s actual square footage. That amount will generally be your home’s replacement cost value. Most insurance companies require you to purchase enough insurance to cover at least 80% of your home’s replacement value. Failing to do so can result in your insurance company only reimbursing you for a proportionate level of coverage, not the total amount. Keep this in mind when considering how much homeowners insurance coverage you may need. Extended replacement cost policies, which pay more than the policy limit, may also be a good idea.
Replacement Cost vs. Actual Cash Value
There are some important differences between replacement cost value and actual cash value, which is another valuation insurers may employ to determine coverage. Insurances with a total insurable value (TIV) or actual cash value (ACV) coverage put caps, or limits, on how much they can reimburse you in case of a claim. Since the insurer loses less money if that happens, monthly premiums are lower.
