Thursday, September 8, 2011

Replacement Cost (RC) vs. Actual Cash Value (ACV) for Commercial Property

Replacement Cost and Actual Cash Value are coverage options that refer to different ways your Property Insurance Policy will cover your building and/or the contents within the building in case they are damaged or lost in a covered risk. Your building and most of your belongings will decrease in value over overtime, so consider these elements when purchasing coverage to protect your business property!

Actual Cash Value is considered basic coverage on Commercial Property policies where your building and contents are replaced with items of like kind and value minus depreciation. In other words your property would be covered for what you might expect to get if you sold it at an online auction, garage sale, or other sales event. 
  • For example, if your building was damaged in a covered peril, your property insurance policy would then pay the actual cash value of your building before the loss. This would work the same way for your building’s contents. If you had a 6 year old refrigerator that was worth $1,100 when you bought it, but only worth $300 at the time of the loss, then your policy would replace it with a refrigerator that is worth $300 at that time, or give you the $300 in actual cash. This coverage generally costs much less then the Replacement Cost Coverage option.

Replacement Cost Coverage is more common than Actual Cash Value. If your building and/or building contents are damaged or lost, then your policy will pay to replace your property or repair damages with materials of similar kind and quality without deducting for depreciation. This type of coverage is key for business owners who want their property replaced or repaired to its original state. 
  • For example, if your 6 year old refrigerator was damaged and needed replacement, your policy would then provide you with a new fridge of equal quality with out depreciation.

Keep in mind that depending on the real estate market at the time of loss, Replacement Cost might be worth less then Actual Cash Value for your building. Although depreciation has occurred, sometimes the increase in property values can create a situation where actual cash value of your building may exceed the cost of replacing the building with similar kind and quality.

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