What is the difference between replacement cost and actual cash value?
Replacement cost pays what it takes to replace damaged property with new property of like kind and quality. Actual cash value pays that figure minus depreciation for age and wear, so an older roof, vehicle or machine settles for considerably less than it costs to replace.
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The detail
Replacement cost settles a loss at the cost of replacing property with new property of like kind and quality, without deduction for depreciation.
Actual cash value settles a loss at replacement cost less depreciation, reflecting the age and condition of the property.
Agreed value suspends the coinsurance condition, with insurer and policyholder agreeing the insured value in advance.
Replacement cost policies commonly pay actual cash value first and the remainder only after the property is actually repaired or replaced.
What this means for you
- The gap grows with the age of what you own. On a new building the two settle at nearly the same number. On a twenty-year-old roof, depreciation can take most of the payment, which is why actual cash value looks harmless right up until it is not.
- Replacement cost usually pays in two parts. The insurer advances the depreciated value and releases the rest once you have actually rebuilt. A business that cannot fund the gap in between never collects the second half.
- Agreed value is answering a different question. It is not a third settlement basis so much as a way to switch off the coinsurance penalty, which is the clause that reduces a partial-loss payment when the building was insured for too little.
- Roofs are where this is decided in practice. Many commercial property policies now carry a separate actual cash value basis for roofs over a certain age even when the rest of the building is replacement cost. It is worth reading before a storm rather than after one.
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Related questions
- Which one should I buy?
Replacement cost, in almost every case where the market offers it, because actual cash value transfers the depreciation back to you at the worst possible moment. The exception is property so old or so specialized that replacement cost is either unavailable or priced beyond what the asset is worth to the business.
- What is coinsurance and why does it reduce my claim?
Coinsurance is a condition requiring you to insure the property to a stated percentage of its value, commonly 80 or 90 percent. Insure it for less and the policy reduces every partial loss payment in proportion, which surprises people because the loss was well inside the limit they bought.
- How the coinsurance penalty is calculated
Need this handled?
Reading about it and having it handled are different jobs, and the second one is ours. We place the accounts other brokers decline — claims history, a cancellation, an unusual operation, a business nobody wants to underwrite twice — and we will tell you when the policy you already have is the right one. Tell us the situation and a licensed human replies the same business day.
Written by the licensed brokers at Boring Insurance. Last updated 2026-09-09. See all guides.