Replacement Cost Coverage

June 10, 2014

Replacement cost coverage essentially means that the insurance company will replace the damaged or destroyed San Juan Island business or personal property with new.  Safe Harbor Insurance always recommends replacement cost coverage on your real and personal property.

Replacement Cost (as defined by the International Risk Management Institute)

A property insurance term that refers to one of the two valuation methods for establishing the value of most of the insured property for purposes of determining the amount the insurer will pay in the event of loss. It is usually defined in the policy as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation.

This may seem simple, but it’s not quite that simple in every case. Let us give you an example of replacement cost coverage from a recent claim we read about. A building owner had some thieves climb up on the building’s roof and steal the copper out of the air conditioning systems. The owner reported the loss to his insurance company. The process usually works this way:

  • The Insurance Company accepts the loss as covered under the policy.
  • Once accepted, the adjuster will offer a settlement.
  • Often the settlement is less than total replacement cost.
  • Once the policy holder fully repairs or replaces the property the insurer offers final settlement.

In the case of the copper theft, the insurance company estimated the total value of the property, and depreciated it for its use. They cut a check to the building owner for a partial payment for the depreciated value. The building owner received a check for $20,000 and a letter stating that when he completely replaces the copper, he will receive another check for an additional $10,000; or whatever it costs to replace the equipment that was destroyed.

Replacement cost is best for most types of property; however, it’s not perfect for everything. A copy of a Picasso is not a Picasso, so fine art is not always covered under a replacement cost policy. It also doesn’t work for things like jewelry, where the value can go up and down with the price of gold and gems. For those types of items you probably need to have a scheduled policy that actually agrees upfront what the value of those items should be. So talk to us about replacement costs and if that’s the right type of coverage for you.