• James Insurance Broker

You May Have Heard of Replacement Cost...What does it actually mean?

Updated: Jan 30, 2019

There are some insurance terms that it seems like you need to be a mix of a lawyer, an accountant and an estimator to understand. Getting into the policy terms can be very cumbersome, with long winded definitions proving to be not very helpful. Do you understand straight line depreciation vs accelerated depreciation? Or the double declining depreciation method? Luckily you don't have to understand any of those methods - just the general idea.

To start - what exactly is Actual Cash Value? How is it determined? A simpler term for actual cash value is simply market value. Take your vehicle that you currently own and look for a comparable one on Kijiji - that gives you an idea of what your vehicle is worth today. That is also the Actual Cash Value or ACV of your vehicle. Generally car insurance is based on ACV and home insurance is based on replacement cost. Before we go into the differences let's look at what replacement cost is.

Replacement cost is simply the cost to replace your property today with something of like kind, make and quality but new. Sound confusing? Not to worry! As we all know brand new cars lose a portion of their value as soon as you drive it off the lot. The loss of value is known as depreciation - what the car was worth while the dealer still owned it vs five minutes later when you drove it off the lot and went to Tim Hortons. If you drove straight back to the dealer and trade it in, and the dealer offered you 80% (a general approximation) - that means the car depreciated by 20%. But we are getting slightly off topic... Now say you took that same brand new car and had replacement cost on it. On your way to Timmies you get into a car accident and the insurance company decides to write the car off. Rather than give you your 80% the insurance company will give you what you paid for the car - meaning you can go buy a brand new car without costing you anything! Unfortunately replacement cost on cars typically only applies to brand new cars at your request for a limited amount of time. However, the majority of homeowner's policies offer replacement cost on most items.

What does this mean for me?

This means if someone steals your old 1990's tube TV that you had a hard time giving away, your insurance would replace it with a brand new flat screen TV. This doesn't mean your insurance company will buy you the top of the line 4k 60" - but really can you complain? Like I mentioned above, this applies to all of the contents in your home, from your TV to your old couch in the basement, right down to those forks you bought when you were in college. This is especially important for Tenant and Condo policies where you choose your own contents limit. If you ever have time go to a mall and see how much it would cost to replace everything in just your living room or bedroom. Even if you have old things - it doesn't matter! The company will give you brand new things - but the most they will pay is the limit on your policy. You will be shocked to see how fast furniture alone can add up to and your $30,000 policy limit is gone in a hurry.

Why Does Actual Cash Value Matter - It matters because some policies are still on Actual Cash value such as policies for cottages, trailers and mobile homes. Newer trailers, cottages and mobile homes or ones in good condition will qualify for replacement cost but you have to be careful with how your policy will actually pay if you have a loss. The other time it comes into play is if you decide not to rebuild your house. Yes if your house burns down you can decide to take a cash settlement instead of getting a new house. The majority of the companies will give you actual cash value of your house - not the cost to rebuild. How is that calculated might you ask? Well that is a topic for another day....

If you would like more information or a quote, please give us a call 905-623-4406 and let one of our experienced brokers help you make the right choice for your auto insurance.

#insurance #replacementcost

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