Replacement Cost

Published: | Updated: November 29, 2016

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Definition - What does Replacement Cost mean?

Replacement cost refers to the amount of money required to replace a piece of property when depreciation of the item's value is not taken into account. In the context of property insurance, replacement cost can dictate the amount an insurer will have to pay out to a policyholder to satisfy 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, whereas others may only cover the actual cash value. The latter refers to the value of an item when depreciation is considered. Wear and tear and simply age can cause an item's value to decrease significantly. For example, the value of a car begins to depreciate as soon as it is driven off the lot after the sale. Therefore, whether an item is insured for its replacement cost or its actual cash value can make a big difference in how much an insurer pays out to satisfy a valid claim.

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