The Funny Thing about Replacement Cost

Replacement cost is a term used to describe the cost of replacing an item lost to an insured peril (something the insurance company is safeguarding your item against) based on how much it costs today. The funny thing about this coverage is that is doesn’t apply to everything and in certain situations, you may unintentionally profit by it!

I have a client who had to make a claim last year for some laptops that were stolen from his office. The problem that he ran into was the fact that his laptops, being office contents, had the replacement cost coverage on them.

So, when he bought the laptops, they had a certain value & since technology is making electronics smaller and faster, the replacement laptop was cheaper that what he had before – so he doesn’t get the same Dollar value spent but he will receive a faster and more powerful product – a bit of a trade off.

In another instance – replacing an old television from a house fire could net you a much better tv! Let’s say you have one of those old wooden televisions – you may be able to upgrade that to a plasma or LCD in the event of an insured loss in your home!

What’s the alternative? Actual Cash Value – basically replacement cost minus depreciation. Commonly found in business insurance policies to define replacement of lost stock, the ACV is a more realistic calculation of the value of the lost items.

Both coverage have their place and are based on replacing the item with today’s dollar but if you can, make sure to get replacement cost as often as possible – you never know, you may eventually end up with a holographic television!

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