Insurance Valuation

In this article we explain insurance valuation, a commonly misunderstood aspect of homeowner’s insurance.

Actual Cash Value vs. Replacement Cost

Does your policy provide replacement cost for your property policy for building and personal property?  It can make a major difference in the final settlement that you are awarded by your insurance company.  Most homeowner policies provide replacement cost coverage on the house itself and attached structures, such as a garage.  Personal property coverage may be written at Actual Cash Value (ACV) or Replacement Cost (RC).  Some high end policies will provide for the full cost without having to actually repair or replace.  But most commercial and homeowner policies require repair or replacement to be done before providing replacement cost benefits.


Under most RC policies, insurance companies will hold back money that is agreed in advance until you can prove you have spent your claim money for the full replacement cost.  The amount paid up front is called “Actual Cash Value”.  This should be what something is worth prior to the loss considering depreciation, obsolescence, condition, etc.  The difference between RC and ACV is often called a “holdback”.  The claim for this holdback is made after receiving the ACV settlement and after the repair is mostly complete.  Personal or business contents replacement cost benefits are usually claimed in batches as items are replaced.

Case Law

But what does the actual cash value of your loss mean?  How can you or your public adjuster deal with a company adjuster who may be overly aggressive applying depreciation? First, look for the definition of “Actual Cash Value” in your policy. Our experience has been that most property policies do not define the terms “Actual Cash Value,”  “Depreciation” or “Holdback.” If it’s not defined, then case law (prior decided court cases) has held that all factors affecting the value of something must be considered, such as replacement cost, fair market value, depreciation, condition, etc., however, the courts have held that not all of the factors must be weighed equally.


Insurance companies will often teach a simple formula to find depreciation. These are based on some in-house life expectancy tables that are at best subjective.  They divide the age of an item by it should last. Then they apply this percentage against the replacement cost of an item. Many would argue the fairness of this method depends on whose life expectancy tables are being used. This method certainly does not take into consideration usage or the care one owner may take versus another.

One particular example comes to mind of  a retired couple who had a living room with snow white carpeting and furniture that was covered in plastic.  Although it was over 30 years old it still remained in pristine condition due to the fact that no one was ever allowed to set foot in that room.  One would expect a household with many family members and pets to have more wear and tear than a retired couple or a single person having the same home and contents purchased within a similar time period.  We should not subject a well maintained building with scheduled maintenance and repairs performed as required to the same standards as a home that has not been kept up.


Every dollar that is reduced in depreciation/holdback is a dollar in your pocket.  Especially if you don’t plan to replace every item you lose.  If all your clothes are burned, they probably include many items that you don’t wear or don’t need.  If you have duplicate or triplicate items, you are likely to replace only one of them.  Now that you know the rules you should know that the fair amount of depreciation to be taken can be subjective and negotiable.  A good public adjuster is ready to fight to get you the maximum settlement possible with the least amount of holdback applied.

For information about alternative resolution, see Appraisal – Alternate Resolution.