The term replacement cost or replacement value refers to the amount that an entity would have to pay to replace an asset at the present time, according to its current worth. In the

insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect ...

industry, "replacement cost" or "replacement cost value" is one of several methods of determining the value of an insured item. Replacement cost is the actual cost to replace an item or structure at its pre-loss condition. This may not be the "market value" of the item, and is typically distinguished from the "actual cash value" payment which includes a deduction for depreciation. For

insurance policies In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as ...

for

property insurance Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, or bo ...

, a contractual stipulation that the lost asset must be actually repaired or replaced before the replacement cost can be paid is common. This prevents overinsurance, which contributes to

arson Arson is the act of willfully and deliberately setting fire to or charring property. Although the act of arson typically involves buildings, the term can also refer to the intentional burning of other things, such as motor vehicles, watercr ...

and

insurance fraud Insurance fraud is any intentional act committed to deceive or mislead an insurance company during the application or claims process, or the wrongful denial of a legitimate claim by an insurance company. It occurs when a claimant knowingly attem ...

.Thomas JE, Wilson B. (2005). The Indemnity Principle: Evolution from a Financial to a Functional Paradigm]. ''Journal of Risk Management & Insurance''
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Replacement cost policies emerged in the mid-20th century; prior to that concern about overinsurance restricted their availability. If insurance carriers honestly determine replacement cost, it becomes a "win-win" for both for the carriers and the customers. However, when a replacement cost determination is made by the carrier (and, perhaps, its third party expert) that exceeds the actual cost of replacement, the customer is likely to be paying for more insurance than necessary. To the extent that the carrier has knowingly or carelessly sold excessive (i.e. unnecessary) insurance, such a practice may constitute consumer fraud. Replacement cost coverage is designed so the policy holder will not have to spend more money to get a similar new item and that the insurance company does not pay for intangibles. For example: when a television is covered by a replacement cost value policy, the cost of a similar television which can be purchased today determines the compensation amount for that item. This kind of policy is more expensive than an Actual Cash Value policy, where the policyholder will not be compensated for the

depreciation In accountancy, depreciation refers to two aspects of the same concept: first, an actual reduction in the fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation i ...

of an item that was destroyed. The total amount paid by an insurance company on a claim may also involve other factors such as

co-insurance In insurance, co-insurance or coinsurance is the splitting or spreading of risk among multiple parties. In the United States In the U.S. insurance market, co-insurance is the joint assumption of risk between the insurer and the insured. In title ...

deductible In an insurance policy, the deductible (in British English, the excess) is the amount paid Out-of-pocket expenses, out of pocket by the policy holder before an insurance provider will pay any expenses. In general usage, the term ''deductible'' m ...

s. One of the champions of the replacement cost method was the Dutch professor in

Business economics Business economics is a field in applied economics which uses economic theory and quantitative methods to analyze business enterprises and the factors contributing to the diversity of organizational structures and the relationships of firms wit ...

Théodore Limperg Théodore Limperg jr. (Amsterdam, December 21, 1879 – Amsterdam, December 6, 1961) was a Dutch accountant, and Professor in Business economics at the University of Amsterdam. He is particularly known for his contribution to the internationa ...

Vendors

Insurers purchase estimations on replacement cost. Major estimation companies include CoreLogic subsidiary Marshall Swift-Boeckh, Verisk Analytics PropertyProfile, Bluebook International, and E2Value. Consumer-focused tools include AccuCoverage and Home Smart Reports.

Home insurance in the United States

If insufficient coverage is purchased to rebuild the home, the insured may have to pay substantial uninsured costs out of their own pocket. In 2013, a survey found that about 60% of homes have replacement cost estimates which are too low by an estimated 17 percent. In some cases, estimates can be too low because of "demand surge" after a catastrophe.Covered by homeowners insurance? Don't be so sure
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Historically, consumers could purchase "guaranteed replacement cost" coverage which ensure sufficient limits if the estimate was too low, but these became "virtually extinct" after several California disasters including the Oakland firestorm of 1991, the Laguna Beach fires, and the 1994 Northridge earthquake.

Underinsurance responsibility

Although insurance is decided at the state-level, most states follow similar practices. In California and Texas, the insured is responsible for determining the proper amount of insurance. However, one survey found that about half of consumers believe it is insurer's responsibility, and consumers may come to this conclusion through the insurer's processes, which one legal scholar argues creates a "reasonable expectation" of coverage, which is a controversial insurance law doctrine adopted in certain states. In California, the 2007 case on the issue, ''Everett vs. State Farm General Insurance Company'', provoked an unsuccessful request by the

California Department of Insurance The California Department of Insurance (CDI), established in 1868, is the agency charged with overseeing insurance regulations, enforcing statutes mandating consumer protections, educating consumers, and fostering the stability of insurance mark ...

and insurance nonprofit United Policyholders to depublish the case.

Infrastructure

urban planning Urban planning (also called city planning in some contexts) is the process of developing and designing land use and the built environment, including air, water, and the infrastructure passing into and out of urban areas, such as transportatio ...

, the replacement cost of

public infrastructure Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and pri ...

(such as

transport infrastructure Transport (in British English) or transportation (in American English) is the intentional movement of humans, animals, and goods from one location to another. Modes of transport include air, land ( rail and road), water, cable, pipelines ...

or water infrastructure) is an important issue to avoid

insolvency In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...

. If the cost of

maintenance The technical meaning of maintenance involves functional checks, servicing, repairing or replacing of necessary devices, equipment, machinery, building infrastructure and supporting utilities in industrial, business, and residential installa ...

and eventual replacement of a

road A road is a thoroughfare used primarily for movement of traffic. Roads differ from streets, whose primary use is local access. They also differ from stroads, which combine the features of streets and roads. Most modern roads are paved. Th ...

(usually due 20 to 25 years after construction) exceeds the funds the (usually local) government has available or could raise to cover it, it could result in

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...

References

{{DEFAULTSORT:Replacement Value Property insurance

Vendors

Home insurance in the United States

Underinsurance responsibility

Infrastructure

See also

References