What is replacement value?
Replacement value is a method for determining what an insurance company will pay you in case your insured 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.
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 coverage to buy a computer similar to the one that was stolen.
However, if you had an actual cash value policy, your insurer would decide if 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.
How do you determine a replacement value?
For smaller items, just check your standard sources to determine what it would cost to replace them. For example, for office equipment, check prices at a local or online office supplies store.
However, for large property items such as a store or office building, it’s best to get advice from a licensed insurance agent or a building contractor. Using software tools, you may be able to determine a rough estimate of real estate and structural property value.
You can then use this estimated replacement value to:
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