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Your Insurance Coverage


Replacement Cost VS. Actual Cash Value

Do you know the difference?

Actual Cash Value:

Also called market value, this term refers to the actual or current value of property just prior to the time of an insurance claim.  The value includes many different deductions i.e.: depreciation due to age, general condition, upgrades, location, obsolescence and use, just to name a few.  Thus, the actual cash value of a 15-year-old building will be much less than the actual cash value of a new building.

Replacement Cost Coverage:

This is the amount it would cost to replace damaged or lost property with a similar one at today’s current costs.  If you have replacement cost coverage on your 15-year-old building, your insurance will pay out an amount that allows you to build a comparable new building with no deduction for depreciation up to the limit on your policy if you actually rebuild. If you choose not to rebuild then the policy falls back to Actual Cash Value and then the calculations start up again.

In order to obtain Replacement Cost coverage the building has to qualify for it. The building needs to be maintained very well, if it isn’t the insurance company may not offer this coverage. We are seeing this today as many buildings are reaching older ages.

To find yourself in this situation could become very significant. What if your creditors require the higher limits of coverage, in order to protect their involvement? In other situations some would feel it is not very significant because upon review they would not rebuild anyway. I have been surprised at the many ideas expressed.

The details and options to deal with this situation can be very complex. I am only touching the surface.

Today’s farmers should purchase insurance from people who know farming. Farming should be viewed as a business, and you should seek advice from people who understand your business.