Replacement Cost vs Actual Cash Value

Valuation basis decides what a loss pays

Replacement cost and actual cash value are the two ways a property policy values what was lost. Replacement cost pays what the item costs to replace today, with like kind and quality. Actual cash value pays that figure minus depreciation for age, wear and condition.

Both terms describe settlement, not coverage. A loss can be fully covered and still settle short, because the valuation basis was decided when the policy was written rather than when the damage happened.

A Texas policy can use one basis for the dwelling and another for part of it. The TDI Home insurance guide explains both terms and notes that the roof is where the two most often diverge on a home policy.

How a replacement cost settlement arrives

A replacement cost settlement arrives in two payments rather than one, and the second payment is conditional on finishing the work.

The sequence on a covered loss:

1. The adjuster prices the loss at replacement cost, then subtracts depreciation and the deductible, and pays that first amount.
2. The owner has the work done and sends the final invoice.
3. The insurer releases the withheld depreciation, called recoverable depreciation, up to the amount spent on the work.

Work that is never completed leaves the withheld half unpaid, which turns a replacement cost policy into an actual cash value outcome by default. The policy form sets a deadline for sending the invoice, and the deadline is printed in the loss settlement section rather than in the declarations page.

How depreciation is figured

Depreciation is figured from the item’s age against its expected service life, together with its condition at the time of loss. Nothing about it is a judgment on the cause of damage.

Worked example, illustration only and not a claim settlement: a roof covering with a 20-year expected service life, damaged in year 15, has used three quarters of that life. An actual cash value settlement on that covering reflects the quarter remaining, and the owner funds the rest of a new roof.

Condition can move the figure in either direction. A well-maintained covering past its nominal life can depreciate less than the table suggests, and a neglected one can depreciate more.

Where an older Texas home meets actual cash value

Roof age is the usual trigger. A Texas home policy can settle an older roof covering at actual cash value while settling the rest of the dwelling at replacement cost, and the TDI Home insurance guide describes that split.

Three places the basis is set on the policy form:

• A roof payment schedule endorsement, which steps settlement down by the covering’s age and material
• A windstorm or hail loss settlement endorsement limited to actual cash value on the roof
• The personal property section, which many forms write at actual cash value unless replacement cost is added

Does Home Insurance Cover a Roof? goes through the causes a roof claim is paid under. Home Insurance for Older Homes in Texas covers the underwriting side of an older dwelling.

Which basis usually applies to what

Valuation is set part by part rather than once for the whole contract.

What was damaged	Usual basis	Where the basis is written
The dwelling structure	Replacement cost	Loss settlement section
An older roof covering	Actual cash value, where an endorsement says so	Roof schedule or hail settlement endorsement
Personal property inside the house	Actual cash value unless replacement cost is added	Personal property section
A detached garage or fence	The same basis as the dwelling	Other structures section
A rental dwelling on a DP-1 form	Actual cash value	Loss settlement section
A rental dwelling on a DP-3 form	Replacement cost	Loss settlement section

The declarations page names the endorsements, and the policy form carries the wording.

What to have ready before you ask an agent

Find the roof invoice first. A documented replacement date is the single fact that moves the valuation basis a Texas insurer will offer on the dwelling.

Have these in front of you:

• The year the roof covering was last fully replaced, and the invoice for it
• The declarations page, with every endorsement listed on it
• The loss settlement section of the current policy form
• How old the wiring, the plumbing and the heating are
• Whether personal property is written at replacement cost or actual cash value
• Any claim paid at the address, with the year and the cause

An undated memory of the year the roof went on does not change a settlement basis, and an invoice does.

Aulona Insurance Group places the coverage this question is about: Texas Home Insurance.

Where Aulona Insurance Group is not the right fit

Aulona Insurance Group cannot place every older Texas house, and a non-renewal date makes that worth knowing early.

Outside what the agency places on an older dwelling:

• An older house with heavy loss history, which usually has to go to surplus lines, a market the agency cannot reach in-house
• A four-point inspection, a wiring repair or a roof replacement, none of which the agency performs or arranges
• Preferred inland owner-occupied home coverage in the Dallas and Fort Worth suburbs, a weak market for the agency

The owner commissions the inspection and a licensed electrician, plumber or roofer signs it. Aulona Insurance Group reads the result and takes it to market.

Luka Cenaj, the agency’s licensed principal, reads the loss settlement section and the roof date on a recorded call before Aulona Insurance Group takes a Texas home to an insurer.