Replacement Cost Clause

Definition - What does Replacement Cost Clause mean?

A replacement cost clause is a clause in an insurance contract that states that the full replacement value will of an item will be reimbursed in the event of a total loss. Replacement value is importantly different from actual cash value. While actual cash value takes into account wear and tear and depreciation, replacement value doe not. So, if your insurance policy has a replacement cost clause, you will be reimbursed for the full initial purchase price of the asset, as opposed to the value of the asset at the time it was lost.

Insuranceopedia explains Replacement Cost Clause

A replacement cost clause can drastically affect the amount of money paid out in the event of a claim, especially an auto insurance claim. Because cars lose value through wear and tear and depreciation faster than many other assets, the difference between its replacement value and its actual cash value can be substantial. If you total your car after four years of driving it and your insurance policy doesn't have a replacement cost clause, you may only be reimbursed for 50% of the initial purchase price. However, if your policy had a replacement cost clause, then you would get the full initial purchase price reimbursed even if your car's actual value was much lower.

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