Replacement Cost
What Does Replacement Cost Mean?
Replacement cost refers to the amount of money needed to replace a piece of property without accounting for depreciation. In the context of property insurance, the replacement cost can determine the payout amount an insurer will provide to a policyholder to settle a claim.
Replacement cost is synonymous with replacement value.
Insuranceopedia Explains Replacement Cost
Some property insurance policies cover the full replacement cost of an insured item, while others may only cover the actual cash value. The actual cash value takes depreciation into account, reflecting the value of an item after considering factors like wear and tear and age, which can significantly reduce its worth. For instance, a car begins to depreciate as soon as it is driven off the lot following the sale. Therefore, whether an item is insured for its replacement cost or its actual cash value can greatly impact the amount an insurer pays out to fulfill a valid claim.
