Replacement Cost vs. Acutual Cash Value

Actual Cash Value (ACV)

The DP-1 and HO-8 policy forms do not define ACV and that can leave it to case lawSome courts have interpreted ACV to mean fair market value, i.e., the amount a willing buyer would pay a willing seller in an arm’s length transaction. Other courts have upheld the insurance industry’s traditional definition: the cost to replace with “like kind and quality” less depreciation. The courts have varied in their rulings as to whether or not depreciation includes obsolescence, e.g., loss of usefulness as a result of outmoded design or construction.

So how do you determine ACV? There is no single correct answer but a useful method is to use the average of:

  1. Current market value (the amount a willing buyer would pay a willing seller in an arm’s length transaction)
  2. Assessed value (from the County Assessor)
  3. Depreciated value (the current replacement cost less depreciation)

If there is a wide variance in the values using the highest value is the only way to be sure there is adequate coverage.

Producers and consumers must work together to in the important process of determining the correct amount of coverage needed.


HO-8 — Modified Coverage Form

New HO-8 AppDid you know that the Iowa FAIR Plan Association offers a Homeowners policy?  It is the Homeowners 8—Modified Coverage Form. This policy provides named perils coverage on the dwelling and contents on an Actual Cash Value basis.   Actual Cash Value (ACV) is replacement cost less any depreciation.  Also, the policy provides:

  • Coverage A (Dwelling): At least $40,000 and up to $200,000 (ACV)
  • Coverage B (Other Structures): 10% of Coverage A (ACV)
  • Coverage C (Personal Property): 50% of Coverage A (ACV)
  • Coverage D (Loss of Use): 10% of Coverage A
  • Coverage E (Personal Liability): $50,000
  • Coverage F (Medical Payment to Others): $1,000
  • Theft Coverage: $1,000 (ACV)

All applications to the Iowa FAIR Plan Association must be submitted by an agent licensed by the Iowa Insurance Division.