Your home insurance policy generally provides for reimbursement or repair of damaged or destroyed property based on its value at the time of loss, without taking depreciation into account. This is what’s referred to as replacement cost.
However, certain conditions must be met in order to receive compensation without depreciation being taken into account. For example, the item must absolutely be replaced or the house must be rebuilt on the same piece of land.
If you decide not to replace destroyed or stolen property, you’ll receive compensation equal to the value of the property at the time of loss, minus an amount for depreciation.
It’s also important to note that the loss of some belongings, such as antiques, cannot be settled at replacement cost. Depending on the value of a belonging, it may be wise to have it insured for an agreed value, which is a predetermined amount.
Examples of compensation
Example of a settlement based on replacement cost
Amount paid for a refrigerator purchased 10 years ago
$800
Current price of a refrigerator with the same features
$1,000
Compensation
$1,000
Example of compensation based on actual cash value
Amount paid for a refrigerator purchased 10 years ago
$800
Current price of a refrigerator with the same features
$1,000
Depreciation ($40 a year for 10 years)
$400
Compensation ($1,000 - $400)
$600
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