Replacement cost (RC) pays what it costs to repair or replace damaged property with materials of like kind and quality, without deducting for depreciation.
Actual cash value (ACV) pays less: commonly replacement cost minus depreciation. Some states define ACV by statute or case law, and some courts use fair market value or a broad-evidence rule, so the exact method varies.
How it shows up in an agency
A 15-year-old roof on a home is destroyed by hail. Replacing it costs $24,000. On an RC basis, the insured collects $24,000 less the deductible. On ACV, the adjuster might depreciate the roof by 60% and pay $9,600 less the deductible. Many carriers now write roofs over a certain age on an ACV basis or with a separate roof payment schedule even when the rest of the home is RC, so a homeowner can have both on one policy.
In commercial property, the valuation basis also drives coinsurance: the required limit is a percentage of replacement cost on an RC policy and of ACV on an ACV policy.
Common confusion
- RC is usually paid in two steps. Most RC policies pay ACV first and the remaining “holdback” only once the insured actually repairs or replaces, within a time limit.
- “Functional replacement cost” pays to replace with modern, cheaper equivalents, which is common for older buildings.
- Guaranteed and extended replacement cost endorsements on homeowners policies add 25% to 50% (or more) above the dwelling limit, or remove the cap, which matters after catastrophes when building costs spike.
- Quote comparisons. When comparing two homeowners quotes, check the roof valuation and the dwelling settlement basis, not just the premium. Raters don’t always surface this. See comparative raters and carriers on our homeowners page.