March 15, 2019

Defining Replacement Cost Value for Property Insurance

Origami boats, one red followed by two blue followed by two green on a pale grey background

As you begin the process of placing your insurance policy with your broker you may discuss how property will be valued and replaced if you make an insurance claim. Often, two options are discussed: Actual Cash Value and Replacement Cost.


Replacement cost (usually abbreviated to RC) is the cost to replace property with like, kind, and quality, without any deduction for depreciation. It is a fairway to address a loss for policyholders because items are replaced based on the value on the date of the loss. Policyholders, with the help of their adjusters, are expected to replace property within a reasonable time period and within any policy limitations. The item(s) must be replaced in order to obtain the replacement cost; otherwise the basis of settlement is actual cash value.

How is Replacement Cost Calculated?

Together with your insurance adjuster, you will provide an inventory of the items that were lost. Typically, the insurer will ask for some proof of ownership such as receipts, appraisals, manual information, and photographs – taking into consideration that some items will be harder to verify than others. To receive replacement cost, the items must be replaced. The insurer may provide you with a vendor who can help you source items or you may purchase on your own and submit receipts for reimbursement.


Picture this, a small fire in your kitchen damages the oven and the ceiling. The following items were damaged beyond repair and are eligible for replacement cost coverage under the terms of your policy:

  • An electric oven and stove top – $750
  • Laminate cupboards – $1,000
  • 10-piece stainless steel cookware set – $500

Large kitchen with white cabinets laminate counters and sage green walls

Remember, policyholders must replace items with like, kind, and quality. Improvements to your property, like a high-end gas oven and stove top, are not part of replacement cost coverage. However, if you want to upgrade during the claims process, you would be responsible for the cost difference.

The claim would be calculated as follows:

$5,000 for repairs, salvage, and work
$2,250 for contents
Total $ 7,250

As part of the terms of your contract, a $1,000 deductible applies. So, the final payout for your claim is $6,250.

Replacement Cost and Insurance Policies

Replacement Cost is fast becoming the most common coverage offered within homeowner package policies. It can apply to your belongings, structure, or equipment depending on the insurance company and type of insurance you are purchasing. Speak with your insurance broker to see if you qualify for Replacement Cost coverage and how it may affect you in the event of a loss.

Bonus: Guaranteed Replacement Cost

If you have Guaranteed Replacement Cost (GRC) on your home insurance policy, you have all the benefits of RC with the addition of a guarantee to rebuild or replace the structure of your home even if the loss exceeds your insurance policy limits.  It is important to discuss GRC coverage with your insurance broker so you understand the exclusions and perils.

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