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Insurance · Claims and Loss Settlement

What is the difference between 'actual cash value' (ACV) and 'replacement cost' coverage?

Reviewed by Jordan Morley, Editorial Lead at 247SimpleTests. Written by the 247SimpleTests Editorial Team from the official source material cited on every question.

Correct answer

ACV pays the replacement cost MINUS depreciation; replacement cost pays the full cost to replace the item with a new one (no deduction for depreciation)

  1. A They are identical
  2. B ACV pays the replacement cost MINUS depreciation; replacement cost pays the full cost to replace the item with a new one (no deduction for depreciation)
  3. C ACV always pays more
  4. D Replacement cost pays nothing

Why this is the answer

ACTUAL CASH VALUE (ACV) vs REPLACEMENT COST: ACV pays the cost to replace the item MINUS DEPRECIATION (the item's used/depreciated value) — e.g., a 10-year-old roof is paid at its depreciated worth, not the cost of a new roof; REPLACEMENT COST pays the FULL cost to replace the item with a NEW one of like kind and quality, WITHOUT deducting depreciation. Property insurance/valuation. Replacement cost coverage costs more (higher premium) but pays more at claim time; ACV is cheaper but leaves a gap (the depreciation). Some policies pay ACV first, then the depreciation amount after repairs are completed. Knowing the difference (ACV deducts depreciation; replacement cost doesn't) is fundamental property insurance valuation knowledge.
Source: Property Insurance — ACV vs Replacement Cost

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About this topic: Claims and Loss Settlement

Claims and loss settlement questions cover the insured's duties after a loss, actual cash value versus replacement cost, the coinsurance formula, deductibles, appraisal and subrogation. This is one of 11 Property Insurance questions on claims and loss settlement, each with a full explanation on a single study page.

New to this exam? Our Insurance exam guide explains the format, scoring, and how to prepare.

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