Fire and Property Insurance: How Will Your Insurance Company Determine How Much Your Home Was Worth? Actual Cash Value, Guaranteed Replacement Cost, and Replacement Cost

By Scott Glovsky on November 15th, 2017 in Insurance

When seeking to recover money for your lost home and property it is important to understand how your insurance policy determines the value of the loss.  Insurance policies generally contain coverage provisions that determine how much coverage you actually have to cover your losses.  It is important to understand the meaning of these coverage provisions to ensure that you are being properly compensated under your insurance policy.

What does “Actual Cash Value” mean?

To truly understand what “actual cash value” is, you should consult the specific definition included in your property insurance policy.  Generally, it means the fair market value or the amount for which you could have sold the house if the house is completely destroyed.  Therefore, if your house is destroyed by fire, then the insurance company would pay the amount of money that the house would have been able to sell for had it not burned down.  Age, condition, and usefulness for a buyer’s purpose are all relevant in assessing the fair market value.

If a property is not completely destroyed, then the actual cash value generally is the money that the repairs would cost minus a reasonable amount for the condition of the property when it was damaged.  It is the insurance company’s obligation to provide a written explanation for all reductions in the amount of payment such as the subtracted amount for the existing condition of the property before the damage.  It is your obligation as the insured to provide sufficient information to the insurance company to establish the actual cash value of the property.

Also, keep in mind that insurers are often only obligated to pay up to the policy limit, whether it is a traditional insurance plan or a California FAIR plan, even if the amount that they pay is less than the actual cash value of the property lost or damages.

California Standard Form Fire Insurance Policy generally provides coverage for the actual cash value of property at the time of loss as long as it does not exceed the amount of costs to repair or replace the property with material of like kind and quality within a reasonable time after the loss.

What is a “Replacement Cost”?

If your insurance policy provides for the replacement cost of your home if it is destroyed by fire, then generally the insurance company is agreeing to provide the cost to replace the home using comparable materials as existed before. However, there is no deduction for the wear or degraded condition of the property before the damage or destruction.  It is important to review the specific definition of the term in your specific policy as it might differ slightly.   Also note that your insurance policy might limit the overall amount the insurance company will pay to replace the home, even if it states you can recover the replacement cost.  The exception to this is if you have “extended replacement cost coverage” which can extend the amount of the payment up to a specific amount or percentage above the policy limit.  Your policy might also have a provision guaranteeing coverage for replacement cost regardless of the limit in a “value protection” clause.

The purpose of replacement cost coverage is to make sure that you get compensated for all of the costs that it will take to put you in the same or in a better position than you were in prior to the damage to your property.

Some but not all property insurance policies also include an “ordinance” or “law” endorsement to cover the additional costs that you may have when you repair or replace a building to be in compliance with current building regulations and codes. Without such an endorsement it is unlikely that your insurer would have to pay for such costs even if you have replacement cost coverage.

What does “Guaranteed Replacement Cost” mean?

Similar to a “replacement cost” some insurance policies provide for a “guaranteed replacement cost.”  If a fire insurance policy provides for a “guaranteed replacement cost” then the insurer is agreeing to pay the entire cost of replacing the home, even if the amount is more money than the policy explicitly provides.  This term helps you guarantee that you will not be underinsured if your house is completely destroyed.

What if my policy limits the payment of replacement costs upon completion?

In some cases, your insurance policy might limit replacement cost payments only until the repair or replacement is finished but offer to pay for costs that are more than the actual cash value if repair or replacement is done within a specified time period, often 180 days. This term allows the insurance company to hold onto the difference between the replacement cost and actual cash value until the repair or replacement work is completed.  Other policies also limit replacement cost on the completion of the repairs or replacement within a specified time period.  It is important that you read your specific policy and look for such a term so that you can make sure that you receive full payment for replacement of property where possible.

Do you have to rebuild or fix your homes with the insurance payment?

If your property is completely destroyed and your insurer pays you either the actual cash value or the replacement cost of the property, you are not required to actually use the funds to rebuild the building on the property.  The insurer cannot condition its payment on you rebuilding and you can use the money to purchase a different property with the funds.