How Replacement Insurance Works

Video Transcript

Hi, this is Jerry at Barbary Insurance Brokerage, and today I’m going to talk about how replacement cost works. Replacement cost essentially means new for old so if something was damaged or destroyed and the insurance company is going to pay you to get a new thing to replace it. However, it’s not quite that simple and I’ll give you an example from a recent claim that I was working on. We insured building owner, building owner had some thieves climb up on the roof and rip all of the copper out of the air conditioning systems and sell it. So now he has to replace those air conditioning systems. The insurance company sent out an adjuster and adjusted this claim in the classic way. First they take the estimate of the value of the property and they depreciate it for its use. Then they cut a check to the building owner for a partial payment for the depreciated value. So he received a check for $20,000 and a letter saying that when it’s time, when he goes and does the replacement, they will send him another check for an additional $10,000 or whatever it costs to replace the equipment that was destroyed. Replacement cost works for most types of property, however, it’s not perfect for everything. A copy of a Picasso is not a Picasso so fine arts are not always, or really shouldn’t be covered under a replacement cost policy. It also doesn’t work for things like jewelry where the value can go up and down with the price of gold and gems. For those types of items you probably need to have a scheduled policy that actually agrees upfront what the value of those items should be. So talk to your agent or broker about replacement costs and if that’s the right type of coverage for you.