Actual Cash Value vs. Replacement Cost: What Each One Pays

Every property claim eventually comes down to one question: is this loss paid on an actual cash value basis or a replacement cost basis? The answer, found in the policy's loss settlement section, can change the check by thousands of dollars.

Quick answer: Actual cash value (ACV) pays replacement cost minus depreciation. Replacement cost value (RCV) pays to repair or replace with like kind and quality without subtracting depreciation, though many policies pay the depreciation part only after the work is done.

The definitions

The Texas Department of Insurance's home insurance shopping guide says actual cash value coverage pays replacement cost minus depreciation, and defines depreciation as a decrease in value from wear and age. It says replacement cost coverage pays to repair or replace your house and personal property at current prices. The Utah Insurance Department defines replacement cost as the cost to replace, rebuild or repair using materials of like kind and quality without subtracting depreciation.

The NAIC's consumer explainer (January 2025) puts the practical point plainly: ACV coverage often does not pay enough to fully replace your property or repair the damage.

The two-step payment on replacement cost

The Maryland Insurance Administration's roof advisory describes how replacement cost claims usually work. If you have replacement cost coverage, the policy covers the cost to repair or replace without deducting depreciation. But most homeowners policies require you to complete the repair or replacement to get full reimbursement. Until then, you will likely receive only the repair cost less depreciation. When the work is finished, you receive the amount that had been held back for depreciation.

The same advisory gives a roof example. If a 20-year-old roof is destroyed by a covered peril, a policy with RCV coverage pays the full cost to replace it, assuming the work is done, while a policy with ACV coverage pays the depreciated cost, which will most likely be far less.

A worked example (our illustration)

A covered storm damages a roof, and replacing it costs $12,000. The insurer applies $4,800 of depreciation. The deductible is $1,000.

	ACV policy	RCV policy
Replacement cost	$12,000	$12,000
Depreciation	− $4,800	− $4,800 (held back)
Deductible	− $1,000	− $1,000
First payment	$6,200	$6,200
After repairs are finished	nothing more	+ $4,800 released
Total	$6,200	$11,000

Same roof, same storm, $4,800 apart. The depreciation amount and how it is calculated vary by policy and insurer, so treat the numbers as illustrative.

What to check on a real claim

• The loss settlement section of the policy, which the Maryland advisory points to for how a claim will be settled.
• Whether repairs must be completed to collect held-back depreciation, and any deadline for doing so.
• How depreciation was figured, since it is the main thing the insured will question.

Try it on real exam questions

Every state's exam is different, and the best way to learn these calculations is to practice them. Take 20 free practice questions for your state, scored instantly with explanations: Alabama, Alaska, Arizona, Delaware, District of Columbia, Hawaii, Idaho, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Wyoming.

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• How Insurance Deductibles Work: Flat, Percentage and Hurricane Deductibles