Glossary
Replacement cost, defined
A way of valuing a loss at today's price for repairing or replacing the damaged property with new materials of like kind and quality, without subtracting for age or wear. The alternative, actual cash value, subtracts depreciation.
In practice
On a home policy it applies to the dwelling and, if endorsed, to contents and the roof. Many carriers pay the depreciated value first and release the rest once repairs are done and receipts are shown, so read the settlement terms. The dwelling limit must be high enough to rebuild at today's prices for the valuation to matter, because no valuation method pays more than the limit.
A worked example
Suppose a ten-year-old roof is destroyed by hail and replacing it costs $18,000. Under replacement cost the insurer pays $18,000 less the deductible once the work is done. Under actual cash value with half the roof's life used up, it pays $9,000 less the deductible and the rest is yours. Hypothetical figures.
Applies to: Home InsuranceRenters Insurance