The Importance of Replacement Cost Coverage


What Is Replacement Cost Coverage?

Replacement cost coverage essentially means that the insurance company will replace the damaged or destroyed property with new property up to the policy limit, as long as it is with “like kind and quality”.  This may seem simple, but it’s not quite that simple in every case. If the value is not accurate, your loss may not be fully covered.

Coverage Terms Defined

Here are some key coverage terms that you should be aware of and familiar with their definitions:

  • Agreed amount– Waives the coinsurance clause on the specified property. As long as this endorsement is in effect, there would be no coinsurance penalty at the time of a claim.
  • Insurance to value– When applying for insurance, each property insurance buyer must decide what policy limits to request.  Insurance-to-value provisions found in many property insurance policies encourage the insurance buyer to purchase policy limits that reflect the values exposed to loss.
  • Stated value– The amount that you say your property is worth when you buy insurance, and is the maximum amount the insurer will pay if your property is lost, damaged, or stolen.
  • Coinsurance– Coinsurance is an arrangement by which the insured, in consideration of a reduced rate, agrees to carry an amount of insurance equal to a percentage of the total value of the property insured
  • Functional replacement cost– The cost of acquiring another item of property that will perform the same function with equal efficiency, even if it is not identical to the property being replaced.
  • Actual cash value– Actual Cash Value is the replacement cost of property damaged or destroyed at the time of loss, with deduction for depreciation. Actual cash value cannot exceed the applicable limit of liability shown in the declarations of the policy, nor the amount it would cost to repair or replace such property with material of like kind and quality within a reasonable amount of time after a loss.
  • Market value-Your market value is based on current economic conditions, building usage, the value of the land, location, and other factors. It’s what your real estate agent would probably list your building for if you put it up for sale
December 4th, 2014 by Partners Risk Services