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The Value of Replacement Cost Coverage
Most homeowners and businesses buy insurance to cover the repair/replacement of loss of damaged property. Generally speaking, insurance companies do a good job of managing claims and helping the owners get their property back to a pre-loss condition. One important part of the insurance process is to understand the difference between Replacement Cost (RC) and Actual Cash Value (ACV) coverage.
Let's start with definitions of each:
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.
Actual Cash Value
(as defined by the International Risk Management Institute)
ACV is typically calculated (1) the cost to repair or replace the damaged property, minus depreciation; (2) the damaged property's "fair market value".
The Value of Replacement Cost Coverage
When you suffer a loss of building or equipment you want to have the funds to replace it, as close to the actual item cost as possible. Replacement cost does that. This is especially true for companies that have expensive production equipment. We will always recommend replacement cost coverage.
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