One of the trickiest insurance claims you can have is when your possessions are lost, stolen or damaged. These claims fall under your Coverage C, also known as your Personal Property or Contents coverage.

There are three things that make these claims difficult. First, you have to prove you owned the item (it helps if you have an inventory).

Second, you have to know if it is eligible for coverage or if it’s excluded.

Third, you have to know whether the insurance company has agreed to pay you the full value of your item or only a partial amount. This article will focus on that last topic.

stacks of dishes

Save Me Time!

  1. Damaged or lost possessions can be insured for either their full replacement value or a partial replacement value called “actual cash value” or ACV. ACV costs less but provides you less.
  2. Under ACV, you will not receive enough from the insurance company to buy a new version of your lost item. The older your possessions are the greater your risk from having ACV.
  3. If you have a loss, ACV tends to result in a more stressful claims experience than replacement value (unless you are a super organized person who can document everything you own).

The Rest of the Story

When you buy your insurance policy, most times you don’t even notice the Coverage C. While some insurers will give you a choice of coverage, many have a default option that they don’t let you change.

This is unfortunate as it means most buyers skip right over this part of their policy and don’t realize what they might be missing.

While you normally won’t be able to adjust the amount of coverage (most commonly 50% of your home’s replacement value) or what items are included or excluded, you may be able to make a choice about the payment terms if you have a loss.

There are two main options an insurance company will normally offer to pay your claim. 

  1. They will pay you what it costs to buy a new version of the item. This is called replacement cost.
  2. They will pay you what it would cost to buy a version of the item in its current condition (before the loss). In other words, they will pay you enough to buy a “used” version of the item. This is called Adjusted Cash Value, or ACV.

The first thing you should do when comparing Contents coverage among companies is understand whether you have replacement cost or ACV. Some companies default you to replacement, but a number use ACV instead.

If you have ACV, there is a greater chance you will be paid less than you expected and be upset with the insurance company.

How ACV Works

I said above ACV will pay you enough to buy a used version of your stolen lost or damaged item. This isn’t precisely correct. Because we’re dealing with insurance companies here, things are a bit more complicated.

The actual calculation for ACV starts with replacement cost. Then, the insurance company applies a depreciation schedule (that, of course, only they know) based on their estimate of its useful life. This will hopefully make more sense after an example so don’t think too hard about the preceding sentence.

Let’s say three years ago you bought a nice suitcase for $500. Suppose the insurance company decides the useful life of the suitcase is five years. That means every year it would say the value went down $100. Thus, after three years, the ACV would be $300 below the replacement value.

If your suitcase were stolen, all else equal, the insurance company would pay you $200 ($500 – $300 of depreciation).

Let’s quickly address the “all else equal”. First, I ignored deductibles for now. Second, we assumed replacement value is $500. That may not be so. If the cost to buy that same model today is $550, then the insurer would instead pay you $250 ($550 replacement – $300 depreciation).

How You Lose With ACV

There are a lot of problems with this approach. For one thing, it’s not very easy to buy a used suitcase! Similarly, where do you go to buy a five year old TV or four year old kitchen table?

Many items in your home are only available new. You need to think about how upset you will be if the insurance company pays you for a claim, but you need to pay some of it out of pocket because you can only buy the item new.

This becomes a greater risk for you as your possessions get older and more expensive. For example, if you bought a $300 TV stand and it’s a year old, you won’t be that short if you have to buy a new one with your ACV reimbursement.

However, if you have a $5000 dining room set that is now ten years old, you are probably going to be pretty disappointed with what the insurance company pays you if you have a loss.

You also should realize that it won’t always be easy to agree with your insurer on what the cost of a replacement should be. What if they no longer make the model of your damaged TV? Or what about a couch where it’s pretty arbitrary what is “similar” to what you had before.

You may find the starting point for the ACV off 25% or more from what you expect. Now, add in the unknown of the insurance company’s depreciation schedule (how many years should a vacuum cleaner last???) and it’s easy to envision being disappointed with what the insurance company offers you for payment under ACV.

The Importance of Inventory

We discussed how to create an effective inventory in a separate article. While an inventory of your possessions is also important if you have replacement value, it matters even more for ACV. Why?

If you know what model TV you had, then replacement value will pay for a new one. It doesn’t care when you bought that television.

But what about when you have ACV? Now, it’s important to document whether you bought that TV three years ago or five years. Can’t remember? You might get a lower depreciation than you are entitled to.

Want to Avoid Disputes? Go With Replacement Value

ACV isn’t necessarily a bad option depending on your needs. If you think you are a low risk to have a claim and you want to save some money, you can go with an ACV option.

However, replacement cost coverage for contents is not very expensive (likely no more than a 5% increase in your premium). Not only will it reduce your out of pocket cost if you have a loss, it also avoids a dispute with the insurance company. 

If you don’t trust yourself to document your possessions well or don’t want the hassle of arguing with the insurance adjuster about why they only gave you 50% towards a replacement rather than 70%, you’re probably better off with replacement value. It will save you a lot of time and stress if you do have a claim.