Replacement vs Actual Cash Value: Commercial Property Terms You Should Know

Commercial property insurance covers loss or damage to a business’ land and equipment. How much subscribers actually receive, however, depends largely on the terms of their individual contracts. When an event triggers an insurance policy, insurance companies have several ways of determining the value of lost property. Two of the most used valuations are replacement value and actual cash value. What do these terms mean? What are the advantages and disadvantages of each method?

Defining Replacement Value and Actual Cash Value

When your insurance claim is approved, adjusters must determine the exact dollar amount to award the policyholder. Of the many ways that exist to arrive at that figure, replacement and actual cash value are the simplest and most popular options.

• In a replacement value agreement, the policyholder will receive enough money to buy a comparable version of the lost item. Payment is meant to enable the subscriber to buy an item of the same material, quality, and purpose as what was lost. Adjusters can grant amounts up to the policy’s full limit.
• Actual cash value policies award policyholders an amount based on the fair market value of their lost item. In this valuation, depreciation weighs heavily on the final payout. Actual cash calculations begin with the price subscribers would pay to get a new version of their lost item. Then the payout is adjusted to reflect the number of years the item was owned, condition at the time of loss, and other factors that would limit the fair market resale value of the item.

The exact meaning of actual cash value can vary by location. Check with the insurance experts at Insure Your Company to find out the latest legal definition for your area.

Advantages and Disadvantages of Different Valuation Methods

Both replacement and actual cash value policies offer unique benefits to subscribers.

Replacement value policies:

• Are easy to understand. Their simple terms significantly reduce subscriber frustration.
• Offer the highest payout in the case of accident or loss.

Actual cash value policies:

• Offer lower premiums for temporarily cash-strapped business owners.
• Can be supplemented with high-value umbrella insurance for greater protection.

They also have drawbacks that should be considered when building a financial protection plan.

• Commercial property owners should carefully consider available cash reserves before signing up for a replacement value policy that covers anything less than 100% of your property’s value. In the case of a catastrophic loss, partial coverages may leave you with a significant funding gap.
• Resource-strong businesses can use actual cash value policies to protect their goods and equipment at minimum cost. Even with the insurance payout, younger operations, recently expanded businesses, and those that rely on specialized tools and materials may not have the cash to replace vital components after a loss.

Which One is Right for You?

Not sure which type of contract is best for your business? Answer these questions to help you understand how different valuation methods can affect your commercial business.

• How much of your company’s assets are liquid? How long do you expect that to last? If you plan to keep a large cash reserve on a regular basis, it may be worthwhile to opt for lower premium actual cash value coverages. If all your resources are tied up in improvements and expansions, protect your investment with higher-value replacement contracts.
• How difficult is it to replace your tools, equipment, and buildings? If you can replenish your workbench with a trip to the local hardware store, actual cash value plans are a great way to reduce monthly expenses. Research facilities, specialized medical practices, and other businesses that use rare and high-value items benefit from the increased payouts from replacement value policies.
• What other policies do you already have in place? In many cases, a large accident or loss will trigger multiple policies. An insurance agent can help you understand what your existing policies cover. Use this information to decide which valuation system works best for your business.

Insure Your Company offers commercial insurance packages that are customized for your business. Still not sure which policy is right for you? Contact our representatives for a personalized assessment of your commercial insurance needs.