Answers for Arizona investors
What's the difference between replacement cost and actual cash value?
Replacement cost pays to repair or replace damaged property with new materials of like kind and quality, without subtracting depreciation. Actual cash value pays the replacement cost minus depreciation for age and wear, so the payment is usually lower, especially on an older roof or building. Your policy and declarations page say which one applies to each part of your coverage.
Side by side
| How it works | Replacement cost | Actual cash value |
|---|---|---|
| What a claim pays | The cost to repair or replace with new materials of like kind and quality | Replacement cost minus depreciation |
| Depreciation | Not subtracted | Subtracted for age and wear |
| On an older roof | Closer to the cost of a new roof | Can be much less than the cost of a new roof |
| Premium | Often higher | Often lower |
| Often found on | The dwelling on many DP-3 and homeowners policies | DP-1 policies, and some roof or contents coverage |
How replacement cost claims are often paid
Many replacement cost policies pay the actual cash value first and the rest after the repair or replacement is done. If you don't repair or replace, you may receive only the actual cash value. The loss settlement section of your policy spells out the exact rule.
Roofs and older homes
Some policies settle roof claims at actual cash value even when the rest of the home is on replacement cost, especially for older roofs. If your rental has an older roof, look for a roof surfacing or roof settlement endorsement on the declarations page and ask what it means for a claim.
What it means for investors
On a rental, the difference between the two can decide whether a claim pays for a full rebuild or leaves a large out of pocket bill. Replacement cost also depends on a dwelling limit that matches today's rebuild cost, so check that number too. The free Portfolio Ledger compares each dwelling limit with an estimated rebuild cost.
Quotes and coverage are subject to underwriting and carrier approval. Everhold Insurance is a licensed insurance agency in the State of Arizona. License # 3004512575.
Questions investors ask
Straight answers.
Is replacement cost the same as market value?
No. Replacement cost is what it would cost to rebuild, while market value is what the home would sell for, including the land. The two can be far apart in either direction.
Can I switch from actual cash value to replacement cost?
Often, yes, at renewal or with a different policy form, though carriers set their own rules and some won't offer it on an older roof. Ask your agent to compare both.
Does actual cash value ever make sense?
Sometimes. On a property you plan to tear down, or one where a lower premium matters more than a full rebuild, actual cash value can be a deliberate choice. Make it on purpose, not by default.
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