What is Replacement Cost Coverage?
If you have purchased a homeowners or commercial policy of insurance, you very likely have coverage for replacement cost. Replacement cost insurance provides that if your property is damaged by an insured peril, you will receive a settlement based upon “like kind and quality” for the full replacement value of the lost property, up to policy limits. So, if you lose your home or business in a covered hurricane event, for example, you are entitled to the replacement cost of the loss, not to exceed the policy value.
What is “Like Kind and Quality?
Simply, comparable replacement using available materials. So, if your flooring is discontinued, adjustment is based upon materials that are equivalent in value and quality. Flooring, siding, roofing and many components become discontinued; television and stereo models are evolving constantly. Replacement cost simply means you may get an unexpected upgrade to your television, if damaged. Insurers use the terms “like kind and quality” to limit the replacement to whatever is currently available and comparable.
What is the benefit of Replacement Cost?
The obvious benefit is that you get “new-for-old”. If you lose your home in a hurricane, you get new flooring, not previously used; you get a new roof, even if your roof was 10 years old; you get new appliances. There are caveats, of course. If your appliances were obsolete and not working, you are not entitled to new appliances. And, if you do not want to replace the property or items, you lose the benefit of replacement cost, but sometimes, it makes sense not to replace as well. If you have items you no longer need, or too many, you can always elect just to receive the “value at time of loss” instead of replacement cost. The choice is yours.
What do I need to look out for with Replacement Cost?
There are things to be aware of when your policy provides replacement cost coverage. In our next series of blogs, we will discuss some of the more common things you need to be informed about:
- Actual Cash Value versus Replacement Cost
- Time Limits for Replacement
- Matching Issues
- Repair versus Replacement
- Co-insurance