Do You Need Replacement Cost Coverage?

road-sign-63983_640Replacement cost coverage essentially means that the insurance company will replace the damaged or destroyed property with new.  We always recommend replacement cost coverage on your real and personal property.

This may seem simple, but it’s not quite that simple in every case. Let me give you an example of replacement cost coverage from a recent claim that I was working on. The building owner we insured had some thieves climb up on the building’s roof and steal the copper out of the air conditioning systems. The process usually works this way:

  • The Insurance Company accepts the loss as covered under the policy.
  • Once accepted, the adjuster will offer a settlement.
  • Often the settlement is less than total replacement cost.
  • Once the policy holder fully repairs or replaces the property the insurer offers final settlement.

In the case of the copper theft, the insurance company estimated the total value of the property, and depreciated it for its use. They cut a check to the building owner for a partial payment for the depreciated value. The building owner received a check for $20,000 and a letter stating that when he completely replaces the copper, he will receive another check for an additional $10,000; or whatever it costs to replace the equipment that was destroyed.

Replacement cost works for most types of property, however, it’s not perfect for everything. A copy of a Picasso is not a Picasso, so fine art is not always covered under a replacement cost policy. It also doesn’t work for things like jewelry, where the value can go up and down with the price of gold and gems. For those types of items you probably need to have a scheduled policy that actually agrees upfront what the value of those items should be. So talk to your agent or broker about replacement costs and if that’s the right type of coverage for you.


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