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Replacement value
The replacement value is how much it would cost to buy a brand-new replacement for a destroyed or stolen item.
What is replacement value?
Replacement value is a method for determining what an insurance company will pay you in case your property is stolen or destroyed. It equals the cost of replacing the property.
How is replacement value different from actual cash value?
Actual cash value is another method for valuing property for insurance purposes. It equals replacement value minus depreciation. Since the actual cash value method results in your insurance company paying less for damaged property, it charges less for this protection.
Commercial property insurance that’s based on replacement value generates larger claim settlements, so insurers charge more for it.
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How does replacement cost property insurance work?
Let’s assume someone breaks into your office and steals one of your computers. A replacement value property insurance policy would provide you with funds to buy a new computer similar to the one that was stolen.
However, if you had an actual cash value policy, your insurer would determine how much the value of your computer had depreciated after you purchased it. Then it would subtract that amount from the computer’s replacement value to determine its current cost. If your computer is several years old, the actual cash value could be significantly less than what you paid for it.
Replacement value doesn’t just apply to computers. It can also cover:
- Landscaping equipment: A stolen mower or trailer is replaced at today’s market price, not its depreciated value.
- Retail inventory: Merchandise lost in a fire or theft can be replaced at current wholesale cost.
- Photography or video gear: Cameras, lighting, and audio equipment are replaced with comparable new models.
- Office furnishings: Desks, chairs, and fixtures are replaced with similar new items.
These examples show how replacement cost coverage can significantly reduce out-of-pocket expenses after a loss.
How do you come up with a replacement value for your property?
For basic items, checking current prices online can be a good starting point. For higher-value or complex property—such as commercial buildings, specialized equipment, or bundled assets—working with an insurance agent can help ensure your replacement value reflects:
- Materials and labor
- Shipping or freight costs
- Installation and setup
- Local construction or market conditions
You can then use this estimated replacement value to:
- Select appropriate policy limits when buying property insurance
- Assign the right property value when submitting a proof of loss
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Updated: April 29, 2022
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