What is the difference between Actual Cash Value (ACV) and Agreed Value?
Actual Cash Value (ACV) is defined as the replacement cost minus depreciation. Depreciation is the decrease in value over a period of time, usually as a result of age or wear and tear. Replacement cost is defined as the cost to replace damaged property with materials of like kind and quality.
For example, assume a car is purchased at $20,000. Five years later the car is estimated to have depreciated to a value of $10,000. The car is involved in a major accident and the cost to repair the damaged vehicle is estimated at $15,000. If the car is insured for the Actual Cash Value, you will receive $10,000 from your insurance carrier, since that is the current value of the car (replacement cost minus depreciation).
Agreed Value means that coverage is provided for a pre-determined amount settled upon by both the insured and the insurance company.
Agreed value is less common for your standard auto insurance policy, but may be used for classic/collector cars, and sometimes boats or motorcycles. To insure an item at an agreed value means that the carrier accepts a value submitted by the insured and the maximum pay out, in the event of total loss or theft, is the agreed upon amount.
When consulting with your insurance provider, it is important to know how the value of your property is determined, and what amount of coverage you have in the event that you have to file a claim.
A common mistake when homeowners are researching insurance quotes is that they often use the purchase price of their home to determine the dwelling value. The purchase price of your home (or market value) includes the land on which the home resides, as well as market inflation. For that reason, your dwelling coverage should always reflect the replacement cost (cost to rebuild) rather than the market value or purchase price.
Assume two identical houses are built – one in the thriving suburbs and the other in a depressed neighborhood. The amount of property protection for the dwelling should be the same, as the cost to build the two houses was also the same. Your insurance company is not insuring the lot on which your house resides, but rather the structure of your home.
Insurance agents use a replacement cost calculator to generate the correct replacement cost. When consulting with your agent explain your home in extensive detail regarding the year the home was built, the square footage of the home, the number of bedrooms and bathrooms, details regarding the kitchen, if there is a fireplace, etc.
Most replacement cost policies require a certain percentage (typically 80%) of the replacement value to be carried at all times. If you carry less than the required percentage, you may be responsible for a percentage of a partial loss. It is recommended you insure your home for 100% of its replacement cost, which will ensure the ability to rebuild the entire house in the event of a total loss.