When filing an insurance claim, determining the extent of loss follows one of two straight forward and established guidelines, actual cash value or replacement value. Both are based on the cost to replace loss property. The main difference between the two is depreciation or value placed on use you have already received from the item.
Actual cash value, or market value, is the value of your property at the time of loss. It is the price you could expect to receive if you sold the item in the marketplace today. This is the most widely accepted method of settlement of losses of household goods or goods used in day-to-day life. For example, your day gets off to a bad start. You get up late; as you are making breakfast, you burn the eggs; the overhead sprinkler system upchucks; and your computer drowns. If your Renters’ Insurance reimburses actual cash value, the loss is what you paid for the computer, less a rate of depreciation that has been established by the Insurance Industry, less your deductible.
Depreciation is calculated following a standard formula that takes into account the category and age of the item, plus its apparent condition (ideally from a photograph), at the time of loss.
A current inventory, along with receipts and pictures, is of tremendous value when you suffer a loss of personal belongings covered by renters’ insurance. The Insurance Information Institute has free inventory software to guide you through the process of cataloging your possessions, not only to determine the amount of coverage that is reasonable and logical, but to have this information organized and easily at hand at the stressful time when it is needed. The software is available at www.nowYourStuff.org.
Replacement value covers actual cost to replace property to be used in the same location for the same purpose. The item may be replaced or repaired, whichever is cheaper. The item is considered destroyed if it cannot be repaired or the cost of repair is more than the cost of the original item.
For example, in our egg disaster, if your $2,000 laptop were destroyed, you would expect to be reimbursed the cost of a new laptop with comparable capabilities, less your deductible.
It is reasonable to insure jewelry, antiques, and items of unusual worth using replacement value. When there can be no established standards for determining depreciation or appreciation, the determination must be a matter of expert knowledge and judgement.
Premiums based on actual cash value are often less than replacement value premiums, but it is not unusual for a renters’ policy, by means of a rider, to insure individual objects using the method of valuation that best suits the situation..