Replacement Cost

Replacement cost is a term generally used in homeowners insurance. It basically states that if you have a claim, you will be compensated for the cost of replacing the property using today's prices. It allows you to put yourself in the same position you were in prior to the loss. It provides you with the necessary money to replace your items with another item of like kind. Compared to actual cash value, replacement cost does not take depreciation into account, so it is more favorable to you as a homeowner. So how does it work? Let's look at a few examples.

Claim Scenario #1:  Your home and furnishings were destroyed during a recent wildfire. You made a claim to your insurance company and have met your deductible. Now you want to replace the damaged furnishings. Last year, you bought a sofa for $2,000. If you have replacement cost coverage, the company might pay you $2,100 because that is what it would cost to buy a similar sofa using today's prices.

Claim Scenario #2: Suppose you have an eight-year old air conditioning compressor that is damaged by lightning and needs to be replaced. The average life span of an air compressor is 16 years. You made a claim to your insurance company and have met your deductible. Eight years ago you paid $4,000, but now it costs $6,000. If you have replacement cost coverage, the insurance company would base the claim payment on the $6,000 cost. 

Homeowners usually prefer payment based on the replacement cost because it compensates you for the actual cost of replacing the property, whereas actual cash value compensates you after deducting for depreciation.

​Pepe Insurance Agency is your trusted local insurance agent located at Poughquag, NY in Dutchess County. We do our best to make sure that our clients are well-protected with affordable homeowners insurance. We make sure to go the extra mile to help you with your needs. To learn more about homeowners insurance and to obtain a free quote, click on the button below.

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