Question

What does "replacement cost" mean?

Answer
By Jacques Wong | Last updated: March 13, 2017

Replacement Cost is one of the 3 methods of calculating something's value. The other two are Actual Cash Value and Book Value. Book Value is not useful in the insurance context and you can read about Actual Cash Value in other parts of this site (find out more in How Auto Insurance Companies Value Your Car).

Replacement Cost is the amount of money it takes to repair or replace the damaged property with something of like kind and quality to the best of the insurer's ability.

The main difference between this and Actual Cash Value is that Replacement Cost does not factor depreciation into the equation, so it more fully indemnifies the insurer in the event of a loss. As such, it can be seen as a "better" coverage option than Actual Cash Value and is, therefore, more expensive. In light of this, most insurance brokers or agents would recommend that you get coverage on a Replacement Cost basis (see What Is an Insurance Broker? to learn more about brokers and agents).

If your item is an antique or unique in some way, it may not be possible for insurers to replace them. In that case, they may opt to simply pay you the item's Actual Cash Value without taking depreciation into account.

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Written by Jacques Wong

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Jacques grew up around the insurance industry and began actively participating in 2013. Since then, he has gotten a Level 2 license, won Insurance Council of BC awards in 2015 and 2020 for academic excellence in the insurance licensing courses. He educates insurance professionals through PNC Learning and as a Thought Leader at ReFrame Insurance.

In his day job as an insurance broker, he helps businesses with creative risk management solutions and strategic advice when it comes to insurance.

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