Replacement Cost
The amount it would cost to replace damaged or destroyed property with a new equivalent, without deducting for depreciation.
What is Replacement Cost?
Replacement cost is a property insurance valuation method that pays the full current cost to repair or replace damaged or destroyed property with a new item of like kind and quality, without any deduction for depreciation. This contrasts with actual cash value (ACV), which subtracts depreciation from the replacement cost. Replacement cost coverage results in higher claim payouts — especially for older property — but also commands higher premiums. Most standard homeowners policies offer replacement cost coverage for the dwelling structure; personal property is often covered at actual cash value unless the policyholder opts for a replacement cost personal property endorsement.
Example
A kitchen fire destroys appliances that are 8 years old. Their actual cash value, accounting for depreciation, is $2,400. Replacing them with equivalent new models costs $6,000. A policyholder with replacement cost coverage receives $6,000 (minus the deductible); one with ACV coverage receives only $2,400 — a $3,600 shortfall requiring out-of-pocket funds.
Source: National Association of Insurance Commissioners — Home Insurance