Replacement Cost

In determining the manner in which policy holders will be reimbursed for losses, insurance companies work on two standard payment models - replacement cost and actual cash value (also known as market value.) The method preferred by policy holders is replacement cost as it represents the best "deal." Often times the insured item is no longer available and the policy holder winds up with a newer model item than that which was lost or damaged.

Insurance companies, on the other hand, prefer to pay according to actual cash value which is the replacement cost of the item minus depreciation factors. For instance if a home computer were on the list of insured items to be replaced, with the actual cash value method the homeowner would receive the worth of the machine were it to be put up for sale on the open market in competition with newer more sophisticated models. The policy holder would then have to make up the difference in cost to acquire a new machine. More Terms Explained