Insurance coverage: replacement value

Ask 10 people which coverage they have - replacement or cash value - and 5 will probably say they don’t know. If you are one of the latter, read your policy or call your insurance agent to determine whether you have cash value or replacement cost coverage. Payment from the insurance company will vary widely between the two.

No matter what type of insurance you have, if you can provide a list and photographs (personal property inventory) of your belongings, you’ll receive a greater settlement than if you have no documentation to support your claim. In fact, the first thing you’ll need to do is create a list for the insurance adjuster, preferably room-by-room, of everything that was damaged, destroyed or stolen, plus when it was purchased and what it cost.

This information will be used to determine the amount of payment you’ll receive from your insurance provider. And that settlement amount will depend on the type of coverage you have.

REPLACEMENT COST
If you have replacement cost coverage, then you should have a favorable settlement when you file a claim. The insurance company will provide payment to replace each item for the full cost of purchasing a new, identical or similar item. (They do reserve the right to repair it to like-new condition.) This is normally completed in a 2-step process once you provide them with a detailed list itemizing your losses. The first step is receiving the cost of the items, less depreciation. Then, after purchasing a like item, and you submit the receipt, the insurance company will pay you the difference.

For example, let's say you had a fire and a sofa was damaged beyond repair. This sofa cost $1000 when it was purchased 5 years ago. A sofa has a 10-year life, so it has depreciated 50%. Therefore, your initial payment will be for $500 ($1000 new, less 50% depreciation). You purchase a new sofa similar to the damaged one, but it now costs $1200. You'll receive an additional $700, reimbursing you for the full REPLACEMENT value ($1200 less the $500 already paid to you = $700).

One exception to this statement is if you reached the limit of your policy. For example, your policy has a limit on many categories of items. Most have a jewelry limit of between $1000 and $3000. If you have a theft of $5000 worth of jewelry, your payment would max out at $3000 unless you have a rider on your policy to cover the additional amount.

Another exception would be if it costs less than the original purchase price to repair or replace the item. This is typical with electronics. A CD player that was purchased when they first hit the shelves cost a great deal more than what you would pay for one now. Your payment would be for the amount that one costs today, not what you paid for it. This is because you received REPLACEMENT value.

Policies differ according to what you purchase and what your insurance company offers. Please consult your insurance agent with any questions related directly to your situation.

Check our blog tomorrow, as we discuss CASH value insurance coverage.