When I’m working on writing anything with property there is one thing that is absolutely crucial. It’s two little words that could make the difference between a beautiful new home or business, or a haphazard building. Those two little words that you should look for every time you look at your policy whether it is your homeowners or commercial property is replacement cost (RC).
Replacement cost is crucial. If your house burns down, the majority will say they want to rebuild their home better than before. Replacement cost will help you do that. Replacement cost is what you would pay for an item in today’s market. Think about that on a grand scale if you were rebuilding your building. All the supplies your contractor would have to buy, even the items in your home or business can be scheduled as replacement cost. It can make the difference between that new flat screen TV and the box TV with bunny ears to pick up any signal. There is another monetary way to classify the structure and what’s in it. It’s call actual cash value (ACV). Actual cash value is the replacement cost minus depreciation. Now think about this too on the grand scale. If your home is insured with this actual cash value system the home itself is going to be replaced based on the depreciation scale. In layman's terms, if your house is built in 1962 and there have been minor improvements, it’s probably not going to get you very far. A great example of RC vs ACV is this: if you bought a couch last year for $2000 and we are replacing it, if you have it valued at ACV you’ll probably get around $1,500 to make up for that depreciation. If you have it insured for RC, you’d get $2,100 because that’s how much it would cost to replace it in today’s market. Even insuring your car is slowly progressing from an ACV standard to where you can actually insure your vehicle for replacement cost. This is usually when you buy the car new though.
Replacement cost is something that everyone and anyone that owns a home should be aware of. While there are instances when ACV is preferred, but usually it should always be insured for replacement cost. If you have questions regarding your policy, contact ECI.