Published 2026-09-14 by Unified Public Advocacy · Part of the Fire Loss Resource Hub
The short version
If your coverage is written on a replacement cost value basis, the policy pays the cost to repair or replace damaged property without deducting for depreciation. If it is written on an actual cash value basis, it pays the depreciated cost.
Depreciation is the loss in value from age and wear. For property near the end of its useful life, that difference is not a detail — it can be most of the money.
Check the declarations page of your policy. NAIC guidance is that if it does not specify replacement cost, the policy likely covers only actual cash value; if it does specify replacement cost, you have replacement cost coverage.
- RCV: pays repair or replacement cost, no depreciation deducted.
- ACV: pays the depreciated cost.
- Depreciation is based on condition at the time of loss, cost of a new one, and how long the item would normally last.
- A replacement cost policy often pays ACV first and holds the rest back until the work is done.
- A policy can be RCV overall and ACV on specific things — roof surfaces are the common example.
What depreciation actually is here
Everything covered by a homeowners policy is assigned a value, and most of it declines in value over time through age and wear. That decline is depreciation.
Insurers generally calculate it from three things: the condition of the property when it was damaged, what a new equivalent would cost, and how long the item would normally last.
It is worth saying plainly that this is not the depreciation an accountant or a tax return uses. NAIC guidance makes that distinction explicitly — insurance depreciation is a different calculation for a different purpose, and the numbers will not match your tax records.
The arithmetic, on one item
The NAIC consumer guide works a small example that makes the mechanism visible. A two-year-old laptop in good condition is destroyed. A similar new one costs 750 dollars. The laptop would normally last four years, so it had lost 50 percent of its value — 25 percent a year for two years. Its actual cash value at the time of loss was therefore half of 750, or 375 dollars, and an ACV settlement includes 375 dollars for it.
Multiply that across an entire household of contents and the shape of a total-loss fire claim becomes clear. The same logic applies to the building.
The same loss under each basis
The NAIC uses two identical neighboring houses to isolate the variable. Both lose a roof in the same storm. Both have a 1,000 dollar deductible. Both roofs cost 15,000 dollars to replace. One household has replacement cost coverage; the other has actual cash value coverage, on a roof that is ten years old depreciating at 1,000 dollars a year.
| Replacement cost policy | Actual cash value policy | |
|---|---|---|
| Cost to replace the roof | 15,000 dollars | 15,000 dollars |
| Depreciation deducted | none | 10,000 dollars (1,000 per year for 10 years) |
| Deductible | 1,000 dollars | 1,000 dollars |
| Insurance payment | 14,000 dollars | 4,000 dollars |
Recoverable depreciation, and what it asks of you
Under a replacement cost policy, the first payment is frequently issued on an actual cash value basis, with the depreciated portion held back. That withheld amount is commonly called recoverable depreciation, and the important word is recoverable: it is generally released once the repair or replacement is actually completed and documented.
That is a real obligation on the household, not a formality. It usually means doing the work, keeping the invoices and receipts, and submitting proof. A replacement cost policy where nobody ever submits proof of completion pays out like an actual cash value policy.
Ask your adjuster exactly what is required to release the holdback, and whether there is a deadline for claiming it. Both answers come from your policy and your state, not from a general rule.
- Is my coverage replacement cost or actual cash value — for the building, and separately for contents?
- How much depreciation has been withheld, and on what line items?
- What exactly do you need to release the withheld depreciation?
- Is there a deadline for completing the work and claiming it?
- Does any part of my policy pay ACV even though the rest is replacement cost?
The exceptions hiding inside a replacement cost policy
A policy is not always one basis throughout. The NAIC notes that even with an RCV policy there may be other limits on what it pays for certain surfaces — a roof being the usual case, where a policy may pay actual cash value on the roof and replacement cost on everything else.
Coverage limits are a separate constraint on top of all of this. Under either basis, dwelling coverage pays only up to the policy limit, regardless of what rebuilding actually costs.
There may also be separate limits on particular categories of contents. If you are compiling a contents inventory, read the limits section of your declarations page before you assume how a category will be paid.
Like kind and quality
Replacement cost coverage generally means repair or replacement with materials of like kind and quality — an equivalent of what was there, not an upgrade and not the cheapest available substitute.
In practice this is where a lot of fire-claim disagreement lives, because equivalence is a judgment. Documenting what was actually there, in specific terms, is what makes that judgment resolvable: the brand and grade of the flooring, the type of cabinetry, the specification of the fixtures. It is another reason the photographs taken before anything is cleaned or removed carry so much weight.
Where the deductible sits
The deductible is the portion of the loss you carry, and the insurer deducts it from what it pays. It can be a flat dollar amount or a percentage of the insured value.
Policies may also carry more than one deductible — special deductibles that apply to particular causes of loss such as wind, hurricane or storm, and sometimes a deductible that applies only to a specific part of the home such as the roof. The all peril deductible applies when one of the special ones does not. Your declarations page sets this out; ask your adjuster which one is being applied to your fire claim and why.
The words, in plain language
- Replacement cost value (RCV)
- The cost to repair or replace damaged property with materials of like kind and quality, with no deduction for depreciation.
- Actual cash value (ACV)
- The depreciated cost to repair or replace the property — replacement cost reduced for age, wear and condition at the time of loss.
- Depreciation
- The decline in value from age and wear. Calculated from the condition at the time of loss, the cost of a new equivalent, and how long the item would normally last.
- Recoverable depreciation
- The portion withheld from a first payment under a replacement cost policy, generally released once the repair or replacement is completed and documented.
- Like kind and quality
- An equivalent of what was lost, rather than an upgrade or a cheaper substitute.
- Deductible
- The part of the loss you are responsible for, deducted from the settlement. May be a flat amount or a percentage, and a policy may contain more than one.
- Policy limit
- The maximum the policy pays for a coverage. Applies under both RCV and ACV, regardless of what the work actually costs.
What this costs people
- Assuming a replacement cost policy pays replacement cost automatically. The holdback is released on proof of completed work.
- Not knowing a roof or other surface is written on an ACV basis until the estimate arrives.
- Never asking how much depreciation was withheld or on which lines.
- Missing a deadline to complete work and claim the withheld depreciation.
- Treating an ACV first payment as the final offer.
- Assuming insurance depreciation matches tax depreciation. They are different calculations.
Related on this site
Sources
The factual statements on this page about insurance claim practice, fire recovery and mortgage handling come from the primary sources below. Where something depends on your specific policy or on the law in your state, this page says so rather than generalizing.
- Post-Disaster Claims Guide
National Association of Insurance Commissioners - What You Should Know About Settling a Homeowners Insurance Claim
National Association of Insurance Commissioners - How do home insurance companies pay out claims?
Consumer Financial Protection Bureau - Publication 547, Casualties, Disasters, and Thefts
Internal Revenue Service