Wednesday, August 17, 2016

What Does "Replacement Cost" Mean?

Please be sure when you get a Homeowners quote or purchase a policy it includes "Replacement Cost" on dwelling and contents. This seemingly small change that costs a few dollars a month makes a huge difference on payout of your personal items within your home.

What Does "Replacement Cost" Mean?
The term "replacement cost" is defined or explained in the policy. Simply stated, it means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose. This applies unless the limit of insurance or the cost actually spent to repair or replace the damaged property is less. Refer to your policy for the exact definition and explanation of replacement cost.

What is "Actual Cash Value"?
The term "actual cash value" is not as easily defined. Some courts have interpreted the term to mean "fair market value," which is the amount a buyer would pay a seller if neither were under undue time constraints. Most courts, however, have upheld the insurance industry's traditional definition: the cost to replace with new property of like kind and quality, less depreciation. Courts have varied in their rulings as to whether or not depreciation includes obsolescence (loss of usefulness as a result of outmoded design, construction, etc.).

So What's the Difference?
The only difference between replacement cost and actual cash value is a deduction for depreciation. However, both are based on the cost today to replace the damaged property with new property. 

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