What is the difference between replacement cost and actual cash value? The cost to repair or replace damaged property with new material of like kind and quality, with no deduction for age or wear, which is what separates it from actual cash value.
Replacement cost is a settlement basis, not a coverage. It means the insurer pays what it costs today to repair or replace what was damaged with new material of like kind and quality, taking nothing off for how old the thing was. Actual cash value is the other basis: replacement cost minus depreciation, so a sixteen-year-old roof is paid as a sixteen-year-old roof. The declarations page says which basis applies to the dwelling and which to contents, and the two are often different, since contents are commonly written at actual cash value unless an endorsement upgrades them.
A replacement cost claim pays in two parts, which surprises people the first time. The insurer issues the actual cash value first, less the deductible, and holds back the difference as recoverable depreciation. That balance is released when the work is finished and the contractor's invoice is submitted, commonly inside a deadline written into the policy. An owner who takes the first check and does nothing keeps only the first check. Roofs are the common place the basis is quietly downgraded: many policies now carry a roof settlement schedule that pays an older roof at actual cash value even where the rest of the dwelling is on replacement cost.
Replacement cost is also not market value and not the assessor's taxable value. Market value is what a buyer would pay for the house and the land under it, and it moves with the neighborhood; the assessor's figure is built for taxation on its own schedule; replacement cost is what a builder would charge to put the same structure back at current labor and material prices. The three can differ by six figures in either direction on the same house, and only the third is the one a dwelling limit should be set from.
A worked example
Wind takes a 16-year-old roof with a 25-year life. Replacement is $24,000 and the deductible is $2,000. On a replacement cost policy the insurer pays the depreciated value first, about $8,640, less the deductible, so the first check is $6,640, and the $15,360 of recoverable depreciation is released once the invoice is submitted, $22,000 in all. On an actual cash value policy the $15,360 is never paid.
The limit this basis applies to
Questions people ask
Is replacement cost the same as market value?
No. Market value is what a buyer would pay for the house and the land under it, and it moves with the neighborhood. Replacement cost is what a builder would charge to rebuild the structure at today's labor and material prices, and the two can differ by six figures in either direction.
Do you always get the recoverable depreciation?
Only after the work is done. The insurer pays the depreciated value first and releases the rest against the contractor's invoice, commonly inside a deadline the policy names, so an owner who takes the first check and never repairs keeps only that first check.