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Asset valuation · InsuranceRCV · ACV · FEMA PA · HUD CDBG-DR

Replacement Cost, Depreciation and Insurance

After a disaster, one damaged building is valued three ways: by its insurer, by FEMA and by HUD. Each treats depreciation differently. Starting from a sound replacement cost value lets you see what insurance will pay, what federal programs will fund, and what is left for your community to cover.

Replacement cost value (RCV)The cost to rebuild or repair with materials of like kind and quality at today’s prices, with no deduction for age or wear. Built from published cost data and square-foot modifiers.
DepreciationThe reduction for age, wear and obsolescence, usually based on effective age relative to useful life.
Actual cash value (ACV)RCV minus depreciation. What the property was worth in its used condition at the time of loss.

1How commercial property insurance pays

First line of defense

When a disaster damages a public building, the commercial property policy or risk pool pays first. On a replacement cost policy, the claim is usually paid in two stages.

  1. Initial ACV payment. The insurer starts from the replacement cost of the damage, deducts depreciation, applies the deductible (and any coinsurance penalty), and issues the first check at actual cash value.
  2. Recoverable depreciation holdback. On a replacement cost policy, the depreciation deducted is “recoverable.” The insurer holds it back until the repairs are complete.
  3. Release on completion. Once you show the work was done and the full replacement cost was incurred, usually within a deadline in the policy, the insurer releases the holdback.
Policy type

RC vs. ACV policies

  • Replacement cost policy: pays ACV first, then the recoverable depreciation after repair.
  • ACV policy: pays only ACV; the depreciation is never paid and becomes part of your uninsured loss.
Coinsurance

Underinsurance shrinks every check

  • If the insured limit is less than the policy’s required percentage of value (often 80–100%), the insurer pays only the proportion carried.
  • An outdated statement of values is the usual cause, which is why accurate RCV matters before the disaster.

2How FEMA and HUD treat depreciation and insurance

Stafford Act · 44 CFR · HUD

Federal programs fund restoration of the damaged facility to its pre-disaster design and function. They do not pay what insurance pays or should have paid.

FEMA PA

Insurance is deducted, actual and anticipated

FEMA deducts actual and anticipated insurance recoveries from otherwise eligible costs. On a replacement cost policy, FEMA generally expects you to pursue the recoverable depreciation, so plan to complete the repair and claim it. On an ACV policy, the uninsured depreciation can remain part of the eligible cost.

44 CFR 206.250(b) · Stafford Act § 312 · Insurance proceeds and reductions

FEMA PA

Obtain and maintain: eligibility, not a deduction

If FEMA funded a facility in an earlier disaster on the condition that you insure it, and you did not obtain and maintain that insurance, the facility is ineligible for PA in the next disaster of the same type. Separately, for buildings in a special flood hazard area without flood insurance, FEMA reduces eligible costs by the maximum amount the National Flood Insurance Program could have paid.

Stafford Act § 311 · 44 CFR 206.252, 206.253 · Obtain-and-maintain insurance

FEMA PA

The 50 percent rule uses replacement cost

FEMA decides whether to repair or replace by dividing its repair cost estimate by the replacement cost of the facility. If repair cost is 50 percent or more of replacement cost, replacement is eligible. Neither figure is depreciated.

44 CFR 206.226(f) · Repair vs. replacement

HUD CDBG-DR

Unmet need after insurance and FEMA

CDBG-DR funds unmet recovery need. HUD requires grantees to subtract duplicative assistance, including insurance proceeds and FEMA funds for the same purpose, before awarding. If recoverable depreciation is paid later, it is also a duplication and must be accounted for.

Stafford Act § 312 · HUD duplication of benefits requirements (84 FR 28836, June 20, 2019)

One more rule to know: under 2 CFR 200.310, property bought or improved with federal funds must be insured at least to the same extent as your other property. That makes the insured value you carry after recovery part of grant compliance, not just risk management.

3Capital stack calculator

Interactive tool

Who pays for the repair: insurer, FEMA or you?

Enter the building’s replacement cost, the damage, depreciation and the policy terms. The calculator follows the insurance payment in two stages, applies FEMA’s insurance deduction and cost share, and shows the remaining local cost that HUD CDBG-DR or local funds would need to cover. Simplified for planning: it assumes the whole repair is FEMA-eligible and ignores sublimits, other deductions and administrative costs.

Building and damage
Effective age ÷ useful life.
Insurance policy
Federal

Insurance

Repair cost (RCV basis)
–
Less depreciation
–
Coinsurance factor
–
Initial ACV payment
–
Depreciation holdback
–
Total insurance
–

FEMA Public Assistance

Eligible repair cost
–
Less actual and anticipated insurance
–
Net eligible
–
FEMA share
–

Remaining local cost

Non-federal share
–
Unrecovered holdback
–
Unmet need (local or CDBG-DR)
–
50% rule ratio
–
InsuranceFEMALocal or CDBG-DR

4Recommended sequence

From RCV to unmet need
Step 1

Establish RCV first

Use published cost data adjusted with square-foot modifiers or a UNIFORMAT II system valuation. RCV caps the facility’s restoration estimate and drives the 50 percent test.

Step 2

Isolate the insurance

Calculate ACV, the deductible, any coinsurance penalty and the recoverable depreciation. Track the holdback deadline in your policy so it is not lost.

Step 3

Calculate the remaining need

Subtract insurance and FEMA funding to find the non-federal share and unmet need, then document every source so no dollar is duplicated.

Simplified for planning. Policy terms, FEMA eligibility determinations and HUD grantee rules control. Not engineering, insurance or legal advice and not FEMA guidance. GovStar is independent and not affiliated with FEMA. Related: FEMA PA Policy on Insurance · Commercial Property Insurance · Funding & Valuation Center.