What is Replacement Cost Coverage vs. Actual Cash Value?
REPLACEMENT COST COVERAGE
Replacement cost is what you would pay to rebuild or repair your home, based on current construction costs.
It is not the market value of the house.
It does not include the value of the land.
ACTUAL CASH VALUE
The standard HO-B and HO-C forms used in Texas will cover replacement cost of the dwelling. However, the HO-A policy form will only cover actual cash value. For personal property, the policies will typically cover only actual cash value unless the homeowner has purchased an endorsement to cover replacement cost.
If your policy only covers actual cash value, the insurance company will not pay the cost to replace the damaged areas of your home. Instead, they will only pay the current, depreciated value of the damage. For example, if your ten-year-old roof is damaged and needs to be replaced, an actual cash value policy will not cover the full cost of replacement, but only the value of a ten-year-old roof.
Where the insurance policy provides for replacement cost coverage, the insurance company is obligated to pay the full cost to replace the damaged structures. The way this typically works is the insurance company will estimate the damage and pay up front the actual cash value of the damage. They will, however, withhold depreciation, which is the difference between the replacement cost and the actual cash value. Once repairs are undertaken, the insurance company is then obliged to pay for depreciation and bring their full payment up to the replacement cost value.