Examples of compensation
Example of a settlement based on replacement cost
| Amount paid for a computer purchased 10 years ago |
$800 |
| Current price of a cumputer with the same features |
$1,000 |
| Compensation |
$1,000 |
Example of compensation based on actual cash value
| Amount paid for a computer purchased 10 years ago |
$800 |
| Current price of a computter with the same features |
$1,000 |
| Depreciation ($40 a year for 10 years) |
$400 |
| Compensation ($1,000 - $400) |
$600 |
For business property
Following a loss, under your business insurance policy, your insurer will indemnify you for the items that were damaged based on their cash value when they were damaged, i.e., taking wear and tear and depreciation into account.
However, when you purchase your insurance policy, you can ask to be indemnified based on “replacement cost”. This means the items will be replaced without taking depreciation into account. If you decide not to replace the damaged or stolen items, you will be indemnified for the items based on their actual cash value.
No matter your choice, before replacing a damaged item, if it can be, your insurer will have it repaired.
For the building
For a building, your insurer will have the damaged portions repaired or rebuilt. If you opt not to have your building repaired or rebuilt, your insurer will reimburse you an amount of money based on its actual cash value.