Replacement Cost
Replacement cost is a property valuation method that pays the full cost to replace damaged property with new items of like kind and quality, without deducting for depreciation.
Exam Tip
RC = no depreciation deduction. Pays MORE than ACV. Must actually replace to get full payment!
What is Replacement Cost?
Replacement cost coverage pays the cost to replace damaged or destroyed property with new property of similar kind and quality—without deducting for depreciation. This provides more complete protection than Actual Cash Value.
Replacement Cost vs. ACV
| Factor | Replacement Cost | Actual Cash Value |
|---|---|---|
| Depreciation | Not deducted | Deducted |
| Payment | Full new cost | Depreciated value |
| Premium | Higher | Lower |
| Out-of-Pocket | Minimal | May need more |
Example Comparison
A 10-year-old roof damaged by hail:
| Method | Calculation | Payment |
|---|---|---|
| Replacement Cost | $20,000 new roof | $20,000 |
| ACV | $20,000 − 50% depreciation | $10,000 |
How Replacement Cost Works
- Initial Payment: Often ACV first
- Hold Back: Remainder (depreciation) is "held back"
- Final Payment: Full replacement cost paid after repairs are completed
- Must Replace: Insured must actually replace the property
Replacement Cost Policies
| Policy | Replacement Cost Applies To |
|---|---|
| HO-3 | Dwelling (usually), personal property (optional) |
| HO-5 | Dwelling AND personal property |
| Commercial | Optional endorsement |
Replacement Cost Conditions
| Condition | Requirement |
|---|---|
| Must Repair/Replace | Can't just pocket the money |
| Like Kind and Quality | Similar function, not upgrades |
| Time Limit | Usually 180 days to 2 years |
| Same Premises | May require same location |
Guaranteed vs. Extended Replacement Cost
| Type | Coverage |
|---|---|
| Standard RC | Up to policy limits |
| Extended RC | 120-150% of limits |
| Guaranteed RC | No limit (rare today) |
Exam Alert
Replacement cost pays MORE than ACV but usually requires actual replacement. Many policies hold back depreciation until repairs are completed.
Study This Term In
Related Terms
Actual Cash Value (ACV)
InsuranceActual Cash Value is a property valuation method that equals replacement cost minus depreciation, representing what property is worth today after accounting for wear and tear.
Coinsurance (Property Insurance)
InsuranceCoinsurance is a property insurance provision requiring the insured to carry coverage equal to a specified percentage (usually 80%) of the property value or face a penalty at claim time.
Homeowners Policy (HO Forms)
InsuranceHomeowners policies are standardized insurance contracts (HO-2, HO-3, HO-5, etc.) that provide property and liability coverage for owner-occupied residences.