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Replacement Cost Value vs. Actual Cash Value

It’s crushing when a fire, hurricane, tornado, flood, or other disaster destroys your home. Most homeowners don’t’ want to relocate after a disaster. They want to repair or rebuild their home as quickly as possible because homes are about families and connections. Homes are more than just walls and roofs.

Some disasters cause so much damage that just calling in an electrician or a roofer won’t make the home – a home again. Some damages require that the home be rebuilt. Rebuilding a home means having the funds to pay contractors to usually tear the house down and then start over again from scratch. It typically costs a fortune to rebuild. Homeowners don’t’ want to just get some of the money and then try for another mortgage on top of the primary mortgage they’re already paying.

There are two common ways that the damages to a home are assessed – actual cash value and replacement value. They’re similar but not identical. The key difference between actual cash value and replacement cost is that with actual cash value, there is a deduction for depreciation.

According to the Allen Financial Insurance Group, replacement cost is generally the most favorable damage determination. Replacement cost is the expense to replace the property so that the replacement is comparable to the property before it was damaged.

Actual cash value can vary from court to court. It’s generally the fair market value of the property which is what a willing buyer would pay a voluntary seller of the property if the seller had plenty of time to sell the property. Many courts use a stricter definition which is that actual cash value is “the cost to replace with new property of like kind and quality, less depreciation.”

What is depreciation?

Depreciation is essentially an adjustment that accounts for the age and wear and tear of a property. For example, a home that you bought for $200,000 would normally have the same replacement cost and actual cash value, if the property was damaged the day you bought the home. If the damage occurred 10 years after the purchase date, then the replacement cost would be about $200,000 (assuming no inflation). The actual cash value would be much less than $200,000 to account for the 10 years of wear and tear to the home. Most buyers of a ten-year old property wouldn’t pay top dollar for your home as compared to buying an identical home next door that had just been built from scratch.

Additional home value factors

In most every case, the cost to rebuild the home would be much higher than what you paid for it because most homes are built as part of a community of homes so the cost of building can be spread out.

Additionally, insurance companies generally don’t pay replacement value unless you meet the co-insurance provision, and still you will need to look to the policy to determine how the replacement cost is determined. In many cases, this is clear but in close-call cases, litigation or negotiation may be required to obtain the replacement value.

If replacement or actual cash value is paid, the homeowner is not required to make repairs or rebuild. He/she can keep the money and make alternate living arrangements such as renting an apartment.

At Warhurst Law, our Alabama and Florida insurance dispute lawyers fight to maximize your recovery. We assert that insurance companies should pay the highest amounts that the insurance contracts and state law require. We work with real estate appraisers to properly assess the value of your home. For help with any natural disaster claim, fire claim, or accidental loss claim; call the experienced lawyers at Warhurst Law. We have insurance adjuster experience in addition to our seasoned legal advocacy experience. You can reach us at 251-207-1296 or fill out our contact form to schedule an appointment. We represent clients through the Southeast including Alabama, Florida, the Gulf Coast and the Florida panhandle.

* Warhurst Law cannot and does not guarantee an outcome to any case.

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