In both personal insurance, like homeowner’s insurance, and in business insurance, such as Commercial Property Insurance, there are often two ways you can insure your property: Actual Cash Value (ACV) or Replacement Cost. Many policyholders aren’t fully aware of the distinction and it’s always best to understand your coverage before you have a claim so you can make adjustments to your policy if needed.
Here’s a quick example: If you bought a computer for your business three years ago and it was stolen when someone smashed the front window of your business, the amount your insurer would pay for the computer would differ depending on the type of property coverage you have.
Computer price when new: $2,000
Actual Cash Value coverage: $1,000. The computer has depreciated due to age.
Replacement Cost coverage: You’ll get the amount needed to replace the computer with another computer of like kind and quality. In other words, you’ll get enough to purchase a comparable replacement.
If you’re curious, the smashed window is usually covered for replacement cost value, meaning the insurer will pay enough to repair or replace the window without a deduction for depreciation — assuming you or your landlord have the window insured. Commercial leases often pass the responsibility for plate glass windows to the tenant.
Actual Cash Value is a common way to provide coverage for business property and is usually less expensive than Replacement Cost Value coverage. The difference in rates is due to how the expected cost when a claim arises. With both types of coverage, you choose your total coverage limit — however, the coverage limit refers to the maximum amount the insurer will pay for a damaged property claim. Specific items are covered for a value that depends on which type of coverage you choose (ACV or RCV), which governs the maximum coverage amount for a given item.