Define Insurance – What does “Replacement Cost” mean?
We’re going to cover a few valuation terms over the next few posts with the Define Insurance series. Today’s term is “Replacement Cost.” What does this mean and how is it used in the event of a claim? Let’s take a look.
The definition in regards to insurance is:
Under this valuation method, the loss will be valued at the cost to repair or replace the insured item regardless of the effects of depreciation.
To put this in what we have always called “plain English,” replacement cost will simply replace your item with the cost to replace the item If you take my broken laptop back in our What Does Agreed Value Mean article, the MacBook that I paid 1,300 dollars would be replaced at the price of a new laptop (remember I got this for a deal well under the 1,700 dollar MSRP). We cannot go out and buy a brand new laptop for the amount I paid so we happily get to settle the claim for the full 1,700 dollar amount.
Where this gets particularly interesting is how some insurance companies, such as Allstate, are insuring roofs. At CoVerica, every company we use for Home Insurance would replace a damaged roof with the actual Replacement Cost to replace the roof less any deductible. Not half of a roof, not part of a roof, the entire roof. Some companies, like Allstate, are using a policy which depreciates the value of the roof over time. Under their new policy, they would only pay for 70% of my roof in the event of a hail claim after the deductible.
To put some numbers to a potential roof claim: An 18,000 dollar roof replacement after a 4,000 deductible (using a 1% deductible here) would also discount my payment by another 5,400 dollars in depreciated costs. After everything is said and done, Allstate would only send me a check for 8,600 dollars for my 18,000 dollar roof. I’m stuck paying the remainder.
Stay tuned to our Blog as we also tackle one of the last valuation methods, Actual Cash Value (ACV).