ACV vs RCV on an equipment insurance claim
Actual cash value (ACV) pays what the damaged equipment was worth at the loss, which is commonly measured as replacement cost less depreciation. Replacement cost value (RCV) pays what it costs to replace the equipment with new equipment of like kind and quality. The difference between the two is depreciation, and it grows with the age of the equipment.
The policy's valuation clause decides which one applies, and its appraisal clause decides how a disagreement over the amount is settled. Lukes & Lukes is an independent Machinery & Equipment appraisal firm. A NEBB-certified Machinery & Equipment Appraiser (CMEA) prepares every report.
By Jared Lukes · CEO & lead appraiser
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The two values on a claim
The gap between the two widens with the age of the equipment. Replacement cost value starts from the price of a new machine with the same capability. Actual cash value starts from the same price and takes off an allowance for age, wear and obsolescence.
- Replacement cost value. The current cost to replace the damaged asset with a new one of like kind and quality, with no deduction for depreciation.
- Actual cash value. The value of the asset as it stood immediately before the loss. Many commercial property forms apply it by default and leave the term undefined.
- Fair market value. The price between a willing buyer and a willing seller. Courts in some states treat it as the same thing as actual cash value.
What decides how ACV is measured
The policy and the law of the state decide. Courts have used three tests: fair market value, replacement cost less depreciation, and a broad evidence rule that weighs both and looks at whichever fits the loss. Some policies list the factors themselves, such as condition immediately before the loss, resale value, normal life expectancy and obsolescence.
Whether installation and labor costs can be depreciated also varies by state. On installed equipment, rigging and commissioning are a large share of a replacement cost, so that single question moves the value.
When replacement cost is paid
Replacement cost coverage is usually conditional. Many policies pay replacement cost only after the property is actually repaired or replaced, and in the meantime pay the actual cash value. Many commercial forms also set a notice window, commonly 180 days from the loss, for telling the insurer you intend to claim the replacement cost. Readers of that language disagree on whether it requires notice or completed replacement within the window, so the exact wording of the policy is the first thing to read.
Equipment that will not be replaced, because the line is obsolete or the business has changed, generally settles on actual cash value.
The appraisal clause and the umpire
Most commercial property policies contain an appraisal condition. When the insurer and the insured disagree on the value of the property or the amount of loss, either side may demand an appraisal in writing.
- Each side selects an appraiser. The policy calls for a competent and impartial appraiser, and each party pays for its own.
- The two appraisers select an umpire. If they cannot agree, either party may ask a court to make the selection.
- The appraisers value separately. Where they differ, the differences go to the umpire, and a decision agreed to by any two of the three is binding.
- The umpire's cost is shared equally.
Appraisal decides the amount of loss. It does not decide whether the loss is covered, and the insurer keeps its right to deny the claim. State statutes add timing and umpire-selection rules in some places.
What the appraiser does on an equipment claim
The appraiser values the equipment item by item as of the date of loss, states the basis of value the policy calls for, and shows the work. On a replacement cost basis that is current new cost for a like-kind unit, including freight, rigging and installation. On an actual cash value basis it is that cost less depreciation, developed from the asset's age, condition and remaining useful life, and cross-checked against the market for used units.
A schedule prepared before the loss, with photographs and serial numbers, gives both appraisers the same starting record. Without one, the file is rebuilt from invoices, service history and the damaged units themselves. We cover both situations on our insurance and replacement cost appraisals page.
What to send
- The policy, including endorsements, the valuation clause and the appraisal condition.
- The proof of loss and the insurer's statement of loss, with its line-item values and its depreciation schedule.
- The equipment list, with make, model, serial number and year.
- Purchase invoices and service records.
- Photographs, before the loss where they exist and of the damaged units.
Common questions
Answers, up front.
What is the difference between ACV and RCV on an equipment claim?
Replacement cost value is the cost to replace the damaged equipment with new equipment of like kind and quality. Actual cash value is the value of the equipment immediately before the loss, commonly measured as replacement cost less depreciation. The difference is depreciation for age, wear and obsolescence.
Does the insurer pay replacement cost up front?
Often not. Many policies pay actual cash value first and pay the replacement cost only after the property is repaired or replaced, within the time the policy sets. The policy's valuation and replacement cost provisions govern.
What does an appraisal clause resolve?
It resolves a disagreement over the value of the property or the amount of loss. Each side selects an appraiser, the two select an umpire, and a decision agreed to by any two is binding. It does not decide whether the loss is covered.
Can the insured hire its own appraiser?
Yes. Each party selects and pays for its own appraiser, and the policy calls for the appraiser to be competent and impartial. The umpire is chosen by the two appraisers or, failing agreement, by a court.