Business owners have a multitude of responsibilities and concerns with running their own business. One of the most important decisions you will make as a business owner is how to adequately insure your property. Here’s a video link to “ACV vs. Replacement Cost: Which Coverage is Right For You?”, which introduces the concepts of ACV (Actual Cash Value) and replacement cost.
Replacement cost covers insureds for the amount it will take to rebuild their business at the same location using the same type of materials. For example, as we see in the video, Sue is able to rebuild her restaurant with one of similar materials and in the same location. However, Sue may choose to rebuild elsewhere.
Bob, on the other hand, has ACV coverage. One method of determining ACV is the cost to rebuild less depreciation. Depreciation is defined as the loss of value in property due to obsolescence, time, and wear and tear. ACV tends to be a less costly coverage option since it is based on the depreciated value of the building and not the cost of reconstructing a new building. The insurance company would pay Bob the ACV and he could use that money to rebuild, purchase property elsewhere, or not rebuild at all.
It is extremely important for you as a business owners to discuss the pros and cons of their coverage with your insurance agent. Each business owner’s situation is unique and your agent can guide you in making the best decision for your business.
The coverages described here are in the most general terms, and are subject to the actual policy conditions and exclusions. For actual coverage wording, conditions, and exclusions, refer to the policy or contact your Central agent.