Understanding Fair Market Value & Replacement Cost Insurance

The idea behind insurance coverage is that your losses are covered properly. So, the payment must be sufficient to replace whatever is lost, damaged or stolen. In that sense, claim payments based on replacement costs is fair for you, especially for low value items like home content.

However, this could be problematic for the insurance companies to agree especially when the items insured is expensive like cars. In such cases, they would prefer Actual Cash Value (ACV) which is replacement cost mines depreciation.

Replacement Cost: The term replacement cost refers to replacing a damaged or stolen item with a similar quality and material item that is used for the same purpose. Companies agree to settle this amount if your policy allows replacement cost. Also, the item must be beyond repair or cannot be recovered.

Actual Cash Value: May be described as fair market value that means a price of the item/goods if it was to be purchased today at its latest condition. Another description is the replacement cost of an item after taking depreciation into account.

What Is the Difference between Replacement Cost and Actual Cash Value?

The real difference between two ways of paying for claims is the deduction of depreciation. While one is looking to pay enough money to buy a similar equipment at new the other takes into account that the item was old and lost its value.

Understandably policyholders would want to get the replacement value while the insurers would want to pay the open market value. How you get paid depends on the stipulation of your policy document wording. Some policies are specially marketed with replacement cost value and some agents may push the policies to be better because it pays replacement value.

Agreed Amount Endorsement: This is another way of settling claims where the insurer and insured agrees the value of the item at the start of the policy and insurer confirms that they will pay this set amount it he property is lost or damaged beyond repair. This clause can be highly valuable when you are insuring classic automobiles as their value vary depending on how well it is maintained.

When it comes to home content insurance you would want to have replacement cost clause on your policy. Otherwise, you run into following problems;

  1. You may not get enough money for your claims.
  2. The main problem is that someone else would be judging the value of your items and they may take a piss out of the process and offer you ridiculous amount.
  3. Where are you going to find a slightly used but otherwise well kept camera to replace yours? The fact of the matter is that people go out and buy another camera from shops when they lose theirs. They don’t go through second hand camera shops and try to find exactly the same one.

However, when it comes to auto insurance you don’t have much choices. Vehicles are expensive items and you cannot expect the insurer to pay you the price of a new car when yours was 5 year old. But then, most people accept this fact. Furthermore, automobiles can be valued accurately depending on their age and condition and there is a market where you can buy a new car that is just like your old one.