Replacement cost

When covered property is damaged, the policy has to decide what it was worth. Replacement cost answers with what it would cost to repair it or buy it new today, at similar kind and quality. Unlike actual cash valueActual cash valueActual cash value (ACV) is what damaged property was worth when it was lost, usually its replacement cost minus depreciation for age and wear.Read the definition, it doesn’t take anything off for age or wear.

How it works

Many commercial property policies that offer replacement cost pay in two steps:

1. At first, the insurer pays actual cash value, which is replacement cost minus depreciation.
2. Once you actually repair or replace the item, the insurer pays the difference, up to your limit and minus your deductibleDeductibleA deductible is the amount you pay toward a covered loss before your insurance pays, usually subtracted from the claim payment.Read the definition.

Policies commonly set a time limit for completing the replacement and claiming the difference. If you don’t replace the property, you may receive only actual cash value.

Replacement means like kind and quality, not an upgrade. A ten-year-old espresso machine is replaced with a comparable new model, not the top of the line.

Insuring to value

Your limit should reflect what it would cost to replace everything today, not what you paid years ago. Many property policies include coinsuranceCoinsuranceCoinsurance is a property policy condition that reduces your claim payment if you insure your property for less than a set percentage of its value, such as 80%.Read the definition, which can reduce a claim payment if your limit is too low compared with the property’s value. Review your business personal propertyBusiness personal propertyBusiness personal property (BPP) is the movable property your business owns and uses, such as equipment, furniture, inventory and supplies, as covered by a commercial property policy.Read the definition limit whenever you add equipment or stock.

An example