Replacement Value

What Does Replacement Value Mean?

Replacement value, also known as replacement cost, is a property insurance term that refers to the cost of replacing an asset in its pre-loss condition with a new asset of similar kind and quality. This value ensures that the insured asset can be replaced without factoring in depreciation.

Insuranceopedia Explains Replacement Value

Replacement cost differs from the other primary valuation method, actual cash value (ACV), which considers factors like depreciation and market value. As a result, coverage for replacement cost typically costs more than coverage for ACV. Additionally, most property insurance policies that offer replacement cost coverage require the asset to be actually repaired or replaced before the insurer pays out the replacement cost. This stipulation helps prevent overinsurance by ensuring that the payout reflects the actual replacement of the asset.