The Difference Between Replacement Cost and Actual Cash Value in Commercial Property Insurance

If you own a business, protecting your property, including buildings, equipment and inventory, is essential. But with commercial property insurance, not all coverage is created equal. One of the most important decisions you’ll make is whether your policy covers replacement cost or actual cash value. Understanding the difference can have a big impact on your bottom line after a loss.

Replacement Cost vs. Actual Cash Value

Both replacement cost and actual cash value determine how much your insurance company will pay you after a covered loss. However, the two approaches calculate that amount very differently:

• Replacement cost (RC)—This covers the cost to replace or repair your damaged property with new materials of similar kind and quality, without deducting for depreciation.

• Actual cash value (ACV)—This pays to repair or replace your property, minus depreciation. It reflects the current market value of your property at the time of loss.

For example, if a 10-year-old piece of equipment is destroyed in a fire, replacement cost coverage would pay for a brand-new model, while ACV would pay only what that old equipment was worth today.

In Texas, many commercial policies default to actual cash value to keep premiums lower, but that can result in higher out-of-pocket costs when it comes time to rebuild or replace damaged property.

Choose the Right Protection for Your Business

The difference between replacement cost and actual cash value can be thousands of dollars. If you’re not sure what kind of coverage you have or which option is best for your business, TS Insurance can help. We assist Texas business owners in reviewing and customizing commercial property insurance policies to meet their needs and budgets. Contact us today to schedule a coverage review.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.