Replacement Cost
Definition
The cost to replace damaged property with new property of like kind and quality, without deduction for depreciation. Replacement cost coverage pays the full cost to repair or replace, regardless of the item's age.
Example
A 10-year-old roof is destroyed by fire. Replacement cost coverage pays the full $30,000 to install a new roof, while actual cash value coverage would pay only $18,000 after deducting depreciation for age and wear.
In Practice
Replacement cost coverage provides better protection than actual cash value but costs more in premiums. Many property policies offer replacement cost as an option or include it for certain items. Policyholders must maintain adequate coverage limits to receive full replacement cost benefits. Some policies include 'extended replacement cost' that pays above the policy limit if construction costs increase.