Actual Cash vs. Replacement Cost

Property insurance is based on values and it is important for both parties of the insurance contract to have a complete understanding of the insured values, it facilitates a satisfactory settlement.

Basically, in the determination of insurable values, there are two methods of insuring property to be considered:-

Replacement Cost Basis 
The term "replacement cost" denotes the cost of replacing the property lost or destroyed without deduction for depreciation. 

Actual Cash Value Basis 
The term "actual cash value" denotes the cost of replacing the property lost or destroyed and then deducting factors for depreciation or betterment. 

Care should be taken not to utilize "book" or "depreciated" values, as these normally reflect the maximum depreciation allowable under tax schedule and other purposes and not the true insurable value. Please note that replacement cost and actual cash value are not the same as "market value" which is determined by other factors, e.g. location, desirability and land value.