Actual cash value vs replacement cost
Coverage · Cloudbreak team · Updated October 29, 2026 · 9 sources
Definition
Actual cash value (ACV) and replacement cost (RC) are the two common ways a property policy values a loss. ACV pays the cost to replace the damaged property minus depreciation; replacement cost pays the full cost to repair or replace it with like kind and quality.
How it works
The gap between the two is depreciation: the value property loses over time from age, wear and tear or obsolescence. A roof near the end of its life can be worth a small share of what a new one costs, so the same damage can produce very different claim payments under each basis.
ACV is most often figured as replacement cost minus depreciation. Depending on the policy wording and state law, it may instead be measured by fair market value, or by the broad evidence rule, which weighs every relevant sign of value.
Replacement cost coverage usually pays in two steps. The insurer pays the ACV first and holds back the depreciation, then pays that amount, called recoverable depreciation, once the property is repaired or replaced. Many policies cap the second payment at what was actually spent.
One policy can mix the two, for example replacement cost on the building and ACV on the roof surface. ISO endorsement CP 14 04 does exactly that for windstorm or hail loss to roof surfacing.1
| Actual cash value | Replacement cost | |
|---|---|---|
| What is paid | What the property was worth at the loss: usually replacement cost minus depreciation, or fair market value, or the broad evidence rule | Cost to repair or replace with like kind and quality, no depreciation deducted |
| When it is paid | Once the loss is adjusted | Usually ACV first, then the withheld depreciation after repair or replacement |
| On ISO CP 00 10 | Default valuation | Optional coverage, only if shown in the declarations |
| Ordinance or law costs (CP 00 10) | No Increased Cost of Construction additional coverage | Not in replacement cost itself; Increased Cost of Construction additional coverage up to the lesser of $10,000 or 5% of the building limit |
| Debris removal (ISO) | 25% of the amount paid plus the deductible, applied to a smaller ACV settlement | Same 25% rule, applied to a larger replacement cost settlement |
| Fannie Mae multifamily | Allowed for roofs | Required basis for property coverage |
On the standard commercial property form
ISO's Building and Personal Property Coverage Form, CP 00 10, values property at ACV, with a few listed exceptions, unless the Replacement Cost optional coverage is shown in the declarations. Under that option, the insurer will not pay replacement cost until the property is repaired or replaced, as soon as reasonably possible. The insured may settle at ACV first and still claim the difference by giving notice within 180 days after the loss.4
Replacement cost under CP 00 10 pays the least of the limit, the cost to replace with property of comparable material and quality used for the same purpose, or the amount actually spent. Replacement cost does not include the increased cost of meeting an ordinance or law; the form's Increased Cost of Construction additional coverage, up to the lesser of $10,000 or 5% of the building's limit, applies only to buildings with the Replacement Cost option.4
Example
NAIC's July 22, 2021 example: two families each have $15,000 of roof damage and a $1,000 deductible. One has a replacement cost policy, paid once the roof is replaced. The other has an ACV policy, with $10,000 of depreciation.7
| Replacement cost | Actual cash value | |
|---|---|---|
| Damage | $15,000 | $15,000 |
| Depreciation | None | $10,000 |
| Deductible | $1,000 | $1,000 |
| Payment | $14,000 | $4,000 |
- Insurer pays$4,000
- Depreciation, not paid$10,000
- Deductible$1,000
- Total$15,000
Where you'll see it
- Declarations page: CP 00 10's Replacement Cost optional coverage applies only if shown there.4
- Statement of values: ACORD 139 has an ACV or RC column for each building and type of property.8
- Endorsements: ISO CP 14 04 for ACV on wind or hail roof surfacing.1
- Lender requirements: Fannie Mae multifamily property insurance must use replacement cost, though roofs may use actual cash value.5
State rules
Texas (TWIA): the Texas Windstorm Insurance Association pays replacement cost claims in two parts, the ACV first and the recoverable depreciation after proof of repairs. Its declarations show coinsurance of 80% or more on replacement cost coverage and below 80% on ACV coverage. Replacement cost is added by endorsement TWIA-164 on commercial policies and TWIA-802 on dwelling policies.9
TWIA's example uses $200,000 of coverage, a 2% ($4,000) deductible, $20,000 of roof damage and 25% depreciation from a 5-year-old roof with a 20-year expected life. ACV pays $11,000. Replacement cost pays $11,000 first and $5,000 after proof of repairs, $16,000 in all.9
Questions
- How is actual cash value calculated?
- Most often as replacement cost minus depreciation. Depreciation is usually based on the property's condition at the loss, what a new item costs and how long the item normally lasts. Some policies and states use fair market value or the broad evidence rule instead.
- Does replacement cost pay before repairs are done?
- Usually only the ACV part. Under ISO CP 00 10, the insurer does not pay on a replacement cost basis until the property is repaired or replaced; the withheld depreciation follows the repair.4
- Can one policy have both ACV and replacement cost?
- Yes. A policy can value the building at replacement cost and some property at ACV. ISO endorsement CP 14 04, for example, settles wind or hail roof surfacing losses at ACV.1
- Is replacement cost the same as market value?
- No. Replacement cost is what it costs to rebuild or replace with like kind and quality, with no depreciation taken off. Market value is what the property would sell for, which can be higher or lower, and is one of the ways ACV can be measured.
Cloudbreak
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Sources
Written by the Cloudbreak team. Numbers, dates and rules cite the published sources below.
- 1. Insurance Services Office (copy hosted by Missouri Farm Bureau Insurance): Windstorm or Hail Losses to Roof Surfacing, Actual Cash Value Loss Settlement, CP 14 04 08 23
- 2. IRMI: Actual cash value (ACV)
- 3. IRMI: Replacement cost (RC)
- 4. Insurance Services Office (copy hosted by Independent Insurance Agents of Texas): Building and Personal Property Coverage Form, CP 00 10 10 12
- 5. Fannie Mae: Multifamily Selling and Servicing Guide, Part II Chapter 5: Property and Liability Insurance (effective October 26, 2026)
- 6. IRMI: Insurance Property Valuation and Loss Settlement Clauses: Important Considerations (William Austin, July 1, 2008)
- 7. National Association of Insurance Commissioners: Rebuilding After a Storm: Know the Difference Between Replacement Cost and Actual Cash Value When It Comes to Your Roof (July 22, 2021)
- 8. ACORD (copy hosted by NIF Group): Statement of Values, ACORD 139 (2004/03)
- 9. Texas Windstorm Insurance Association: Factors that Affect the Claim Payment Amount