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The Difference Between Replacement Cost Coverage and Actual Cost Coverage

aa damaged propertyOften times we are asked to explain the difference between replacement cost coverage and actual cash value coverage.  Both of these terms describe insurance coverage intended to cover you for your damaged or stolen property.  However, the amount you receive for your damaged or stolen property will depend largely on whether you have replacement cost coverage or actual cost coverage.

Replacement cost coverage will pay you for the item in today’s dollars.  For instance, let’s say your sofa was stolen or damaged from your home.  Replacement cost coverage will reimburse you the full cost of replacing the sofa with a new one of like kind.

On the other hand, actual cash value will pay you the replacement cost of the sofa minus any depreciation.  The best way to understand actual cash value is that the most you could expect to receive from the insurance company for your stolen or damaged sofa is approximately the same price you would have received if you had tried to sell the sofa prior to it being stolen or damaged.

So to quickly recap, both actual cash value and replacement cost coverage are both based on the cost today to repair or replace the damaged/stolen property with new property.  However, actual cash value will deduct that amount by applicable depreciation whereas replacement cost does not factor in any depreciation.

But what happens when you have to make a claim for your damaged property?  If you had purchased replacement cost coverage, insurance companies may pay you the actual cost value of the repair and wait until you submit a receipt for the cost incurred for the total repairs before they pay you for the difference.

Indeed, Florida Statute Sec. 627.7011 was amended to codify that practice.  The Florida legislature’s final bill analysis provides that the amendment to the statute “changes current law relating to the payment of replacement costs.  For partial dwelling losses, the insurer must initially pay at least the actual cash value of the claim, less any insurance deductible.  The remaining amount owed on the claim (i.e., the difference between the initial amount paid and the replacement cost) is paid by the insurer periodically as the repair work is done and expenses are incurred by the policyholder.”  Slayton vs. Universal is a case decided by the Fifth District Court of Appeal that discusses these issues as well.

Please note, however, that insurance companies are not permitted to deduct depreciation from the total and final replacement cost payment.  While they may “withhold” payment until the actual expense is incurred, they cannot deduct “depreciation” from said payment if you have replacement cost coverage.

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