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Many Renters Insurance Plans Are For Actual Cash Value
By Mike Heuer

Actual cash value is a more affordable alternative to replacement cost as it costs insurers less to pay claims, even when it comes to renters insurance. But actual cash value also can leave renters at risk to financial loss beyond what insurance claims might pay.

Actual cash value takes into account several factors, the primary factor being depreciation. Depreciation is defined as the cost to repair or replace a damaged or destroyed home minus depreciation costs due to wear and tear and other factors. Several court judgments break down depreciation and actual cash value among three key areas.

One of those three areas is the replacement cost minus depreciation, which takes into account wear and tear of a thing of value, such as furniture. But it also takes into account the demand for something of value. Because new furniture can be built, the older a couch or chair is, the lower its value becomes over time due to depreciation.

So when things are built or manufactured, over time, they will lose value. For insurance purposes, only the value of an item determines the amount to be paid if a claim is filed due to a loss caused by a covered peril. Most insurers will use a formula taking into account replacement cost minus depreciation to determine an item’s actual cash value, and many court cases have upheld that measure.

Actual cash value also can be determined by the fair market value of an item. Insurers can assess the fair market value by the amount for which similar items are sold and base claims accordingly. The price of goods can vary based on several factors, such as location that might affect local prices and the general quality of goods.

If an item is rare or particularly valuable, such as artwork or an antique the “broad evidence” rule might apply. The rule takes into account the fair market value of an item as well as its replacement cost minus depreciation. Some court jurisdictions will favor one definition over the other, so the primary method used might vary by state. Both methods are used to determine the actual cash value of an item and have several court decisions in their favor.

If unsure of the actual cash value of an particularly valuable item, for insurance purposes, it can help to get a formal assessment of it from an acknowledged expert as well as keep track of the amounts similar items might be selling for during auctions or other points of sale.

Mike Heuer is a former insurance producer in Nevada with expertise in Property & Casualty and Life and Health insurance. He also is a former newspaper reporter with 20 years’ experience in print media.