What is the difference between replacement cost and actual cash value?

Replacement cost value (RCV) and actual cash value (ACV) are two methods insurers use to determine claim payouts for property damage. The difference can mean tens or even hundreds of thousands of dollars on a claim.

Replacement cost coverage pays the amount needed to repair or rebuild the damaged property using materials of like kind and quality at current prices. If a 15-year-old roof is destroyed by a storm, replacement cost coverage pays for a new roof without deducting for the age or wear of the old one. Fannie Mae's Multifamily Selling and Servicing Guide (Part III, Chapter 6) specifically mandates replacement cost coverage with no coinsurance provision or an agreed amount endorsement for all DUS loans, and Freddie Mac's Multifamily Seller/Servicer Guide (Chapter 58) imposes a similar replacement cost requirement. HUD's MAP Guide (Chapter 7) also requires replacement cost coverage for FHA-insured multifamily properties.

Actual cash value coverage, by contrast, deducts depreciation from the replacement cost. Using the same example, if a new roof costs $80,000 but the old roof had depreciated by 50% due to its age, the ACV payout would be approximately $40,000. The owner would need to cover the remaining $40,000 out of pocket.

For apartment buildings, replacement cost coverage is strongly preferred because it provides enough funds to fully restore the property. ACV coverage may result in a funding gap that the owner must fill to complete repairs, which can be especially problematic when damage is extensive. The premium for replacement cost coverage is higher, but the difference in claim payouts makes it the more practical choice for most apartment owners.