What Does Replacement Cost Really Mean?
February 28, 2021
In the event of a loss, the last thing you want to be worrying about is whether or not you will be compensated for your losses. You rely on your home and your business for livelihood. It is important to make sure you understand how your coverages will compensate you in the event of a loss.

How much you can expect to be paid for your insurance claim typically depends on three key factors:
  1. How accurately can you describe, document, and show the lost value of your property
  2. The type of policy and coverage you have
  3. “Actual cash value” vs. “Replacement Cost”
In order to make sure you get the right amount of compensation for lost items or property; it is a great idea to keep a detailed inventory of your items. You should keep a copy of the inventory online or at a location separate from the property being inventoried, that way in the event of a total loss you do not lose your inventory as well. Every insurance company has their own criteria of what they look for at the time of a loss, discuss with your DFA Insurance agent for a form or guidelines they use. You could include the following in your inventory:
  • The item descriptions with make and model, if applicable
  • When you originally purchased the item
  • The price you paid for the item
  • The item’s replacement value (updated annually)
  • Photographs of the item (Update annually)
  • The original receipts, if applicable
The type of policy and coverages you have influences the amount you get compensated in the event of a loss. Different insurance policies provide different coverages. Pay attention to the risks that are covered as well as the exclusions and special limits for certain items. Discuss with your DFA Insurance agent what your specific policy covers and if you are correctly covered. You should meet with your agent annually to have this discussion as the items you have and your properties may change year to year, thus your coverage would need to adjust to match those changes.

Actual Cash Value insurance provides you with the depreciated value (original value less age and wear and tear) of an item at the time of the loss.  It’s very important to note that this type of policy does not provide you with enough to replace what you’ve lost.  For instance, if your barn burns down, actual cash value would only pay you the depreciated value of the barn.  With Actual Cash Value coverage, it’s likely you will have to pay some of the replacement expense out of your pocket.

Replacement Cost provides you with a payment equal to what would be required to replace the lost item, up to the limits of your policy.  In our barn example, replacement cost would work like this, after the fire you would be provided with the actual cash value (value of the building noted above).  As you rebuild, if your costs exceed the actual cash value, the insurance company would pay you the difference between the actual cash value and the final replacement cost – again up to the limits of your policy.

The difference between replacement cost and actual cash value can mean the difference between getting your operation up and running without additional financial strain or having to reach into your own pocket to rebuild.  Before you experience a loss, meet with your DFA Insurance agent, and discuss which type of coverage will meet your needs – there are reasons to choose both.

Before you experience a loss, meet with your DFA Insurance agent, and discuss your needs. Your agent will walk through all of your questions with you and make sure that you have the correct coverage for your needs. Don’t be unprepared when the unexpected happens. Give DFA Insurance a call today at 1-877-358-9523 to discuss your needs with a qualified agent.