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 Florida, homeowner's insurance policies may offer either actual cash value coverage or replacement cost coverage for property damage following a covered loss. Actual cash value coverage reimburses the homeowner based on the depreciated value of the damaged or destroyed items, taking into account age and wear and tear. For instance, if a fire damages an old appliance, this coverage would pay out its current, depreciated value, which could be significantly less than the cost of a new replacement. On the other hand, replacement cost coverage pays the full cost to repair or replace the damaged property without considering depreciation. This means if a new item is needed to replace one that was damaged, the insurance will cover the full cost of a comparable new item. Most homeowner's insurance policies in Florida include replacement cost coverage for the structure of the home itself, ensuring repairs or rebuilding with similar quality materials without a reduction for depreciation. To understand which type of coverage a policy provides, homeowners should review their policy's declarations page. Both coverage types are subject to deductibles and policy limits, which define the out-of-pocket expenses and the maximum payout by the policy. Additionally, for high-value items like jewelry or art, homeowners may consider endorsements or riders, which provide additional coverage beyond standard policy limits and may require appraisals of the items insured.