Replacement Cost Clause
What Does Replacement Cost Clause Mean?
A replacement cost clause is a provision in an insurance contract that stipulates the insurer will reimburse the full replacement value of an item in the event of a total loss. Replacement value differs significantly from actual cash value. While actual cash value accounts for wear, tear, and depreciation, replacement value does not. Therefore, if your insurance policy includes a replacement cost clause, you will be reimbursed for the full initial purchase price of the asset rather than its depreciated value at the time of the loss.
Insuranceopedia Explains Replacement Cost Clause
A replacement cost clause can significantly impact the payout amount in the event of a claim, particularly for auto insurance. Cars depreciate and lose value due to wear and tear much faster than many other assets, making the gap between their replacement value and actual cash value substantial. For instance, if you total your car after four years of use and your insurance policy lacks a replacement cost clause, you might only be reimbursed for around 50% of the original purchase price. However, with a replacement cost clause in your policy, you would receive the full initial purchase price, even if the car’s actual cash value is much lower at the time of the loss.
