Replacement value
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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 industry, "replacement cost" or "replacement cost value" is one of several method 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 for property insurance, 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 and insurance fraud.[1] Replacement cost policies emerged in the mid-20th century; prior to that concern about overinsurance restricted their availability.[1]
Replacement cost coverage is designed so the policyholder will not have to spend more money to get a similar new item and that the insurance company does not pay for intangibles.[2] 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.[3] This kind of policy is more expensive than an Actual Cash Value policy, where the policyholder will not be compensated for the depreciation 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 or deductibles. One of the champions of the replacement cost method was the Dutch professor in Business economics Théodore Limperg.
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
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.[4] In some cases, estimates can be too low because of "demand surge" after a catastrophe.[5]
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 199, the Laguna Beach fires, and the 1994 Northridge earthquake.[6]
Related Terms
References
- ^ a b Thomas JE, Wilson B. (2005). The Indemnity Principle: Evolution from a Financial to a Functional Paradigm]. Journal of Risk Management & Insurance. Free full-text.
- ^ Adjusting Today The Replacement Cost Claim
- ^ University of Missouri Actual Cash Value vs. Replacement Value
- ^ "Insurers Continue to Improve Their Home Valuations, Says MSB". www.insurancejournal.com. Retrieved 2016-01-17.
- ^ Covered by homeowners insurance? Don't be so sure. CNN Money. WebCite archive.
- ^ San Nicolas, Silvia (2006). "Collateral Replacement Cost Risk: What Every Lender and Investor Needs to Know" (PDF). Bluebook International. Retrieved 2016-01-17.
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