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Actual Cash Value vs. Actual Cost

Summary: These pages consider replacement cost coverage as a feature of the Insurance Services Office (ISO) broad and special homeowners and dwellings forms. Included are references to the 2000 homeowners endorsements, which provide additional amounts of insurance. Replacement cost recovery on personal property, available by endorsement to homeowners forms, is reviewed at the end of this discussion.

Topics covered:Overview Building amountBuilding lawsBuilding laws and total lossesHousehold appliancesCosmetic lossesProcedure Replacement requirement80 percent requirementDifference illustratedPersonal property endorsementPersonal property valuation


The effect of replacement cost coverage is to change the method of recovery for loss on affected, covered property from actual cash value to the actual cost of replacement. Actual cash value see Actual Cash Value is most often defined as replacement cost less depreciation. An adequate amount of insurance on a replacement cost basis eliminates the deduction for depreciation.

Before going any farther in this discussion, a definition of the word replace or replacement is necessary. A standard desktop dictionary says that to replace means “to put something new in the place of.” An even better definition comes from The Dictionary of Real Estate Appraisers: “The estimated cost to construct, at current prices, a building with utility equivalent to the building being appraised, using modern materials and current standards, design, and layout. Replacement cost insurance, then, provides a new item for the damaged or destroyed one. This concept was clarified in Great Texas County Mutual Insurance Company v. Lewis, 979 S.W.2d 72 (Tex. App. Austin 1998). Here the court said that the words repair and replace mean “restoration to a condition substantially the same as that existing before the damage was sustained.”

Building Amount

Adequate amount of insurance must be considered from two angles. First, to be fully protected the amount of insurance must be equal to the potential maximum loss; any amount less will be inadequate to cover a total loss. Some insurers offer guaranteed replacement cost by means of a non-ISO endorsement that overrides the limits of the policy, but commonly the limit applicable to the insured structure is the maximum the insured can recover. In 1994, ISO introduced two optional endorsements—HO 04 20 10 00 , Specified Additional Amount of Insurance for Coverage A—Dwelling (to be used with forms HO 00 02 10 00 and HO 00 03 10 00 only), and the HO 04 11 10 00 . Additional Limits of Liability for Coverages A, B, C, and D (forms HO 00 02 and HO 00 03 only). These two endorsements are reviewed below, since they operate differently from many guaranteed replacement endorsements in use today. The HO 04 11 was reissued in 2000 with no changes, and the HO 04 20 was revised in 2000 with changes for clarification.

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