At the time of a claim, the type of coverage on your policy will become very important to you. Replacement Cost or Actual Cash Value coverage on your policy could make quite a difference to how the claim is settled. Both forms of coverage are good or right depending on the many circumstances.
So, what is the difference? Actual Cash Value is the actual or current value of property just prior to the time of damage. The value includes many different deductions i.e.: depreciation due to age, general condition, upgrades, location, obsolescence and use, just to name a few. So, the actual cash value of a 15-year-old building not being used and on a vacant yard may be much less than the actual cash value of a new building fully utilized on the main street of your community.
Replacement Cost Coverage is the amount it would cost to replace damaged property with a similar one at today’s current costs. If you have replacement cost coverage on your 15-year-old building, your insurance will pay out an amount that it takes for you to build a comparable new building with no deductions up to the limit on your policy. If you choose not to rebuild then the policy falls back to Actual Cash Value and then the calculations start up again.
The building has to qualify for Replacement Cost. The building needs to be maintained very well, if it is not the insurance company may not offer the coverage.
The difference in coverage is not only important for total losses but also for partial losses. On partial losses the depreciation can quickly add up and this difference you would have to pay by yourself if you have Actual Cash Value coverage.
Be sure to seek advice and purchase insurance from an insurance broker who understands your business!