What is the difference between Replacement Cost Value (RCV) and Actual Cash Value (ACV)?

You’ve probably seen these terms before and already know that your lender requires your home policy to have coverage on an RCV basis.

To understand these terms, it is also important for you to understand the concept of indemnification. The principle of any home insurance policy is to indemnify you, which means to repair or replace your home/personal belongings to the same condition as it was before (with no upgrades or downgrades).

What does RCV mean?

RCV (Replacement Cost Value) is full coverage, with no depreciation based on use or lifespan. For example, if your roof is damaged from a hail storm, you will be covered for the complete replacement of a new roof, no matter how long ago your roof was installed.

What does ACV mean?

ACV (Actual Cash Value) is depreciated coverage based on the age and use. If your roof was installed 15 years ago and is covered on an ACV basis, then you would only be covered after a certain percentage of your roof is deducted by the insurance company.

Comparing RCV vs ACV: What's the Difference?

The key difference between RCV and ACV lies in how depreciation is handled. RCV coverage does not factor in depreciation, potentially leading to higher payouts, while ACV coverage does take depreciation into account, which may result in lower payouts. Choosing between the two will depend on your personal circumstances, the value of your property, and how much risk you're willing to assume.

Real-life Examples of ACV vs RCV

Example of ACV: Let's say you have a 10-year-old roof that gets severely damaged in a storm. If you have an ACV policy, your insurance company will consider the roof's original cost and its expected lifespan, then subtract any depreciation due to its age or wear and tear. So, if your roof originally cost $20,000 and has a lifespan of 20 years, you might only receive $10,000 from your insurance company after a loss.

Example of RCV: Now, let's consider the same scenario but with an RCV policy. In this case, your insurance company would cover the current market cost to replace your roof, irrespective of its age or original cost. So, if it costs $25,000 to replace your roof today, that's the amount you would likely receive from your insurance claim, minus your deductible.

Most home insurance policies* today offer coverage on an RCV basis, but if a portion of that policy is covered only on an ACV basis, it would be clearly outlined on the declarations page.

*Some policies will only cover your roof on an ACV basis if it is older than 15 years. This does not mean that the rest of your dwelling is also on an ACV basis - the rest of your home and its contents would still be covered on an RCV basis. If you have an older roof, it’s good practice to ask your provider to make sure.