One of the most common ways to explain 'replacement cost' in a homeowner insurance policy is to compare it to 'actual cash value' or 'fair market value'. Using these common insurance terms,
in a homeowner policy, actual cash value is the replacement cost of a home or personal property less depreciation.
In the event of a covered homeowner policy loss, ideally you would rather have the loss amount covered in full and not subject to depreciation. This is especially important since, in the event of significant damages to the dwelling, construction cost are always escalating and could render your loss payment to a very low amount, compared to what will be the actual cost to repair the damages.
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
Replacement cost coverage means that your property if damaged by a covered peril will be replaced with like items regardless of their age or depreciation. In practice if you have a loss of personal property the company will estimate the actual cash value of the damaged property and send you a check for that amount. As you actually replace the item with another of like quality you will file for an adjustment to meet the replacement cost. This is why photographic records are so helpful. In the case of the structure the company is generally quite involved with reconstruction and makes progress payments to the contractors involved.
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in a homeowner policy, actual cash value is the replacement cost of a home or personal property less depreciation.
In the event of a covered homeowner policy loss, ideally you would rather have the loss amount covered in full and not subject to depreciation. This is especially important since, in the event of significant damages to the dwelling, construction cost are always escalating and could render your loss payment to a very low amount, compared to what will be the actual cost to repair the damages.