Question

CREC, Inc. owns a 1-story frame building with protection class 7 which has a limit of insurance at $100,000, a covered causes of loss special form and a replacement cost inflation guard of 4%. CREC insures its business personal property with a limit of $25,000, covered causes of loss special form and a no dollar limit on business income and extra expenses but it is subject to a twelve (12) month maximum.

Q: The replacement cost of the building is $175,000, however, its actual cash value is $125,000. How much with the carrier pay and why will it pay that amount?

Answer 1

In the insurance industry, "replacement cost" or "replacement cost value" is one of several method of determining the value of an insured item. Replacement cost is the actual cost to replace an item or structure at its pre-loss condition. This may not be the "market value" of the item, and is typically distinguished from the "actual cash value" payment which includes a deduction for depreciation. For insurance policies for property insurance, a contractual stipulation that the lost asset must be actually repaired or replaced before the replacement cost can be paid is common. This prevents overinsurance, which contributes to arson and insurance fraud Replacement cost policies emerged in the mid-20th century; prior to that concern about overinsurance restricted their availability,

SO the carrier will pay replacement cost with the addition of debris removal expenses if any incurred less deductible amount as per the term signed.