How do insurance companies estimate damaged property for claim payouts?

How do insurance companies estimate damaged property for claim payouts?

Information Guide

Asset Protection

Alice Yao | Updated August 13th, 2020

Have you ever wondered how your insurance claim payout is calculated after filing a covered claim from your homeowners or condo policy? 

The estimated value of an insured item is the most important factor in determining an insurance payout. There are two methods of value estimation that insurance companies use to determine the payout of an insured item: replacement cost value (RCV) and actual cash value (ACV). 

In this article, we will go over these topics:

Family room with a nice TV

RCV vs ACV: How are they different?

Let's start with a simple example to compare the two methods of estimation:

In your family room, there is a 60-inch LED TV that was purchased 2 years ago for $1,200. One day, you came home from work to find that one of your neighbors' kids hit a baseball through your window and broke the TV. 

Your insurance company will compensate you for the TV using RCV vs ACV:

estimated $1,200  estimated $800


RCV - cost to buy another 60-in LED TV with the same or similar spec.

ACV - cost of the 60-in LED TV after 2 years of depreciation with 4 years of useful life remaining.

What is replacement cost value (RCV)?

Replacement cost value is the cost to replace an insured item at its full value without any consideration of age or present condition of the item. In other words, RCV is the estimated cost to purchase an insured item or one of equal value as brand new. 

RCV is the most common method of value estimation used in property insurance policies, including homeowners and condo.

What is actual cash value (ACV)?

Actual cash value is the cost to replace an item while factoring depreciation. In essence, ACV is RCV minus age and current condition of the insured item. 

Common items that use ACV applications: 

  • Fence and shack
  • Wall-to-wall carpeting 
  • Awning
  • Outdoor antenna

How do I know whether I have things insured using RCV or ACV?

In your policy booklet, there is a section that lists how your insurance company reimburses you for RCV specified items. In the same section, the booklet will also list certain items that are insured using ACV estimation. 

Our recommendation is to consult your insurance agent to find out if any high value or important item is insured as RCV or ACV.

Computer equipment next to brightly lit window

What if I decided not to replace an insured item?

In most instances, if you choose not to repair or replace an insured item after a covered loss, your insurance company will allow you to take ACV of the damaged item. If you change your mind afterwards and want to replace the item instead, you may still do so by submitting a receipt for the total cost of the item. Your insurance company will reimburse you for the difference between the total cost and ACV. 

Keep in mind that there may be a time frame you are allowed to submit for reimbursement after accepting the initial ACV payout.

While RCV is the preferred method of claim settlement, certain items have much higher rates of wear-and-tear compared to others. This is why insurance companies designate specific items for ACV. 

We always recommend reaching out to your insurance agent as every insurance company has its own guidelines. Be sure to review the details of your coverages to ensure you are properly and adequately covered.

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