Replacement value
Encyclopedia
The term replacement cost or replacement value refers to the amount that an entity would have to pay to replace an asset at the present time, according to its current worth.
In the insurance
industry, "replacement cost" or "replacement cost value" is one of several method of determining the value of an insured item. Replacement cost is the actual cost to replace an item or structure at its pre-loss condition. This may not be the "market value" of the item, and is typically distinguished from the "actual cash value" payment which includes a deduction for depreciation. For insurance policies for property insurance
, a contractual stipulation that the lost asset must be actually repaired or replaced before the replacement cost can be paid is common. This prevents overinsurance, which contributes to arson
and insurance fraud
. Replacement cost policies emerged in the mid-20th century; prior to that concern about overinsurance restricted their availability.
Replacement cost coverage is designed so the policyholder will not have to spend more money to get a similar new item and that the insurance company does not pay for intangibles.
For example: when a television is covered by a replacement cost value policy, the cost of a similar television which can be purchased today determines the compensation amount for that item. This kind of policy is more expensive than an Actual Cash Value policy, where the policyholder will not be compensated for the depreciation
of an item that was destroyed.
The total amount paid by an insurance company on a claim may also involve other factors such as co-insurance
or deductible
s.
In the insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
industry, "replacement cost" or "replacement cost value" is one of several method of determining the value of an insured item. Replacement cost is the actual cost to replace an item or structure at its pre-loss condition. This may not be the "market value" of the item, and is typically distinguished from the "actual cash value" payment which includes a deduction for depreciation. For insurance policies for property insurance
Property insurance
Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance or boiler insurance. Property is insured in two main...
, a contractual stipulation that the lost asset must be actually repaired or replaced before the replacement cost can be paid is common. This prevents overinsurance, which contributes to arson
Arson
Arson is the crime of intentionally or maliciously setting fire to structures or wildland areas. It may be distinguished from other causes such as spontaneous combustion and natural wildfires...
and insurance fraud
Insurance fraud
Insurance fraud is any act committed with the intent to fraudulently obtain payment from an insurer.Insurance fraud has existed ever since the beginning of insurance as a commercial enterprise. Fraudulent claims account for a significant portion of all claims received by insurers, and cost billions...
. Replacement cost policies emerged in the mid-20th century; prior to that concern about overinsurance restricted their availability.
Replacement cost coverage is designed so the policyholder will not have to spend more money to get a similar new item and that the insurance company does not pay for intangibles.
For example: when a television is covered by a replacement cost value policy, the cost of a similar television which can be purchased today determines the compensation amount for that item. This kind of policy is more expensive than an Actual Cash Value policy, where the policyholder will not be compensated for the depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
of an item that was destroyed.
The total amount paid by an insurance company on a claim may also involve other factors such as co-insurance
Coinsurance
Co-insurance is an insurance-related term that describes a splitting or spreading of risk among multiple parties.-In the United States:In the US insurance market, coinsurance is the joint assumption of risk between the insurer and the insured...
or deductible
Deductible
In an insurance policy, the deductible is the amount of expenses that must be paid out of pocket before an insurer will pay any expenses. It is normally quoted as a fixed quantity and is a part of most policies covering losses to the policy holder. The deductible must be paid by the insured,...
s.