You bought insurance to protect your property against future losses. The future arrived and you suffered a loss. To get things back to the way they were, you have to file a claim with the insurance company.

Before you make an insurance claim, it is important to understand three concepts: depreciation, actual cash value, and replacement cost. All of these will affect the amount you receive during the claim settlement.


  • Depreciation refers to the loss in value due to any cause. This includes wear, tear, and age.
  • Actual cash value (ACV) is the price that someone would have paid for an item just seconds before that item was damaged or destroyed.
  • Replacement cost (RCV) is the actual cost of repairing or replacing an item that was damaged or destroyed.

How is Depreciation Calculated

The most common way of calculating depreciation is assessing an item’s replacement cost and its average expected lifespan.

For example, many insurance companies assign a 5-year life span for electronics like TVs. For each year of age, they will deduct 20% (100% / 5 years) of the replacement cost for each year of age the TV had. So, if the replacement cost is $1000, and your old TV was three yeas old, the insurance company will depreciate it 60% (20% x 3). They would assign it an actual cash value of $400 as a result.

There are a couple of things to remember when it comes to depreciation:

  • Certain items should not be depreciated. This includes jewelry, antiques, fine art, masonry, framing, insulation, lighting fixtures, and computer media like CDs.
  • Other items should be depreciated at a slower rate than others. Clothing and electronics depreciate faster than appliances and hard furniture.

ACV vs. RCV Insurance Policies

Insurance policies that cover property can use two different models for calculating the amount the carrier will pay.

The first is an actual cost value policy. This kind of policy will only pay the calculated ACV of the items destroyed or damaged. Once the check is cut, that is it.

The second is a replacement cost policy. This kind of policy will cover the entire amount it will take to replace the destroyed or damaged items on the claim. It involves a multi-step process. The insurance company will first cut a first check for the ACV of the property damaged or lost. Then, it is up to the property owner to purchase replacement items or to have the damage repaired. Once that is done, the owner can submit the receipts to the insurance company to get reimbursed for the difference. The insurance company should then cut a check back for the difference.

How a Typical Insurance Claim is Processed

When you file a claim with your insurance company, that company will assign an adjuster. That adjuster works with you to create a detailed list of everything that was damaged or destroyed. This list can be quite varied, with items as diverse as roofing materials, insulation, clothing, electronics, and furniture. The adjuster will note the age, condition and replacement cost of each item on the list.

Using values provided by his employer, the adjuster is going to apply depreciation to everything on that list. That is how he will determine the actual cash value of the claim. For items not on the tables, the adjuster will use his own discretion to assign value.

If you have an ACV insurance policy, you will receive a check for the calculated actual cash value of the destroyed or damaged items. That is the total amount that will be paid on the claim.

If you have an RCV insurance policy, you will need to replace or repair the damage to get full reimbursement.

Using the TV example from above.

With an ACV policy, you will only receive $400 to cover the actual cost value of your old TV.

With an RCV policy, you will still get that $400 payment. Then, when you replace the TV with a new one, you submit a receipt to the insurance company. They will cut a check for the difference between the purchase price and the amount of the first check. So, if the new TV cost you $1000, and they had already cut you the $400 check, they will reimburse you the remaining $600 in the second check.

You should review all items on your insurance claim for calculated cash value and replacement cost. You may find the amount depreciated is excessive or inaccurate. You have the right to dispute the depreciation amount on any item.

If you have to file an insurance claim, it is in your best interest to have someone to help. A public adjuster can work for you to maximize your claim settlement and get you the money to which you are entitled. If you believe you are not receiving the full amount that you deserve for a settlement, contact us today.

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