A homeowner's insurance policy may reimburse the homeowner for property damage after a covered loss on a replacement cost basis or on an actual cash value basis. Although both types of policies may be helpful following a covered loss, actual cash value policies are based on the depreciated value of the items of personal property that were damaged or destroyed, while replacement cost coverage reimburses the homeowner for the full amount of replacing the damaged or destroyed property.

Actual Cash Value Coverage

A homeowner's insurance policy with actual cash value coverage usually determines the value of damaged or destroyed personal property by reducing or depreciating the amount of the reimbursement for age and wear and tear of the property.

For example, if a fire in your home damages your 20-year-old refrigerator, a policy with actual cash value coverage would only reimburse you for its depreciated value—which may be substantially less than the cost to purchase a new one.

Replacement Cost Coverage

A replacement cost policy will pay to repair or replace damaged personal property without deducting for depreciation. This coverage may be available for both your personal property items and for your home if they are damaged by a covered peril.

For example, if you have replacement cost coverage for your personal property, your insurance will help cover the cost of buying a comparable new item at the current price.

And most homeowner's insurance policies come with replacement cost coverage for the structure of your home. This dwelling coverage typically helps pay to repair or rebuild your home using materials of a similar quality, and does not reduce the amount reimbursed based on age, wear and tear, or other depreciation factors.

Which Type of Policy Do I Have?

To determine whether your homeowner's insurance policy is a replacement cost policy or a cash value policy, review your policy—specifically, read the policy declarations page that summarizes the policy’s coverage, limits, and deductibles, and is usually attached to the insurance policy as the first page or one of the first pages of the documents you receive from the insurance company.

Deductibles and Limits

Whether your homeowner's insurance policy is a replacement cost policy or a cash value policy, you may have to pay a deductible before the coverage kicks in after a covered loss. And both types of coverage are subject to the policy’s limits, which is the maximum amount the policy will pay toward a covered loss.

Endorsements

A standard homeowner's insurance policy may provide limited coverage for certain valuables such as jewelry, watches, artwork, musical instruments, valuable collectibles (historical documents, stamp and coin collections, sports memorabilia). Scheduled personal property—property that is itemized or scheduled—is a type of endorsement or rider that offers increased protection for such items. Such a supplemental insurance policy may require an appraisal of the scheduled items.

In Colorado, homeowners can choose between two types of insurance coverage for their property: Actual Cash Value (ACV) and Replacement Cost Coverage. ACV policies reimburse the homeowner for the depreciated value of damaged or destroyed items, taking into account age and wear and tear. For instance, if a fire damages an old refrigerator, the ACV policy would pay out its current, depreciated value, which could be significantly less than the cost of a new one. On the other hand, Replacement Cost Coverage pays the full cost to repair or replace damaged items without considering depreciation. This means if personal property is damaged, the insurance will cover the cost of purchasing new, comparable items. Most homeowners' insurance policies in Colorado also include replacement cost coverage for the structure of the home itself, helping to pay for repairs or rebuilding to a similar quality without depreciation deductions. To determine which type of policy you have, review the declarations page of your insurance policy. Both ACV and Replacement Cost Coverage are subject to deductibles and policy limits, which are the maximum amounts the policy will pay for a covered loss. Additionally, homeowners may purchase endorsements or riders, such as Scheduled Personal Property endorsements, to increase coverage for valuable items that typically have limited coverage under a standard policy, like jewelry or collectibles. These endorsements may require appraisals of the scheduled items.