Replacement Cost Coverage Vs Actual Cost Value: Is Your Business Covered?

Whether you own a small restaurant or a small marketing firm, you likely purchased equipment to ensure that both you and your employees could get the job done. That equipment might be a new range and oven for the kitchen or computers and design software for your marketing team. It might also be the camera and lenses you use if you do freelance photography. Regardless of what you buy, if it is expensive, you would probably want some kind of certainty that that equipment is protected and insured.

You may choose to protect your equipment with a general liability policy or, you may try to get more specific, and opt for an actual cash value (ACV) policy or replacement cost policy. But deciding which one you need can be a bit confusing. And to dispel that confusion, and to make sure you do not select the wrong policy, we have defined and detailed the differences between the two.

What Is a Replacement Cost Policy?

A replacement cost policy will fully reimburse you for damaged or stolen property. When exploring a replacement cost coverage definition, damage typically refers to any injury to the property that is sudden and catastrophic. Insurers will not replace equipment that experiences damage from overuse. They will also refuse to replace equipment if the cost to repair that equipment is cheaper than the cost of replacing it.

That is a broad definition of the policy (due to its flexible nature). For a more exact definition you will need to review a policy from an actual provider. Our independent insurance agents will work to find a replacement cost policy that can be tailored to your needs. Your equipment should be covered, and we will find the means for you to do just that.

Still unsure on how to define replacement value? Here are a few examples to consider.

When there’s smoke

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Gary’s Pancake House is the most popular breakfast joint in town. One weekend, after a busy shift, a chef forgets to turn off one of the griddles before heading home. The heat is enough to cause some of the residual oil to smoke and it doesn’t take long for a full fire to erupt (there are over 8,000 fires a year in the industry).

Gary’s Pancake House doesn’t burn to the ground but most of the cooking equipment is a loss. Luckily, Gary has a replacement cost policy and is able to buy all new equipment once repairs are made to his restaurant.

Welcome to the neighborhood

A new store just opened in downtown. The owners are excited to show off their unique collection of art, decorative items, and gifts. After a successful weekend sale, the owners head home to celebrate. When they come back the next day, they see a rock has been thrown through the window. Upon closer examination, the owners notice their cash register is missing along with their office computers (1 in 10 businesses experience a burglary or theft each year).

Though it’s a disappointing and scary experience, the owners are able to replace their equipment without jeopardizing their bottom line, thanks to their replacement cost policy.

Kids will be kids

Michelle loves her job as a family photographer. She’s always exploring new spots for family portraits and enjoys capturing those magical moments. Unfortunately, she has a session with a family that includes a couple rowdy young boys. Instead of sitting still and waiting for Michelle to set up their portrait, the boys start an impromptu game of tag. One trips over Michelle’s new camera, cracking the lens. She’s upset but not worried. Her insurance should replace the camera.

However, Michelle’s claim is denied. The camera is worth several thousand dollars but replacing the lens only costs a few hundred. Michelle eats the cost and never schedules a session with the rambunctious family again.

What Is ACV?

Actual cash value, like a replacement cost policy, is designed to at least partially reimburse you for your damaged or outdated material. Unlike a replacement cost policy, an ACV will only cover part of that replacement cost. ACVs account for depreciation which means that whatever the insurance company believes your property is actually worth is what they will pay you for it.

Think about an ACV like you would think about selling that property at a garage sale. You would not try selling your equipment for the price you bought it for, you would have to account for depreciation. Again, a more exact definition of can be found within your policy due to the gray areas associated with ACVs.

Need a couple examples? Here are some based on actual claims we’ve seen.

Not cool

Stephen’s heating and cooling business has had a few rough years. But the local economy is improving, and his schedule is starting to fill up. He’s excited to see what the hot summer months will do for his income. He’s fixing air conditioners left and right one weekend when he gets a call from his secretary. There’s been a break-in at the office and all of their computers have been stolen.

At first, Stephen’s not all that upset. He calls his insurance broker to file a claim but gets news he wasn’t expecting. With his actual cash value policy and the fact that he didn’t have the funds to update his computers in the recent past, he won’t be getting much of a payout. Stephen ends up spending all his extra funds on new computers.

Total blow-out

Mary owns a small salon in the middle of downtown. Her clients are like family. One aspect Mary prides herself in is making sure her salon always keeps up with the latest technology. She recently updated her computer system so her clients could make appointments online, check in on a touch screen in the lobby, and pay on tablets right from the chair.

One night, a bad storm blows through downtown. It busts the main window in the lobby, sending glass, debris, and rain water into her salon. About half of her new computer system is destroyed. Luckily, even though Mary has an actual cash value policy, she was diligent about updating her inventory with her insurance company. Even though she doesn’t get dollar for dollar what she paid, she’s back in business as soon as her lobby is cleaned up.

When comparing actual cost vs replacement, an ACV policy can be scary, especially if your office equipment is older. Computers depreciate quickly. One common method used to calculate a computers worth is to take its original price and multiply it by 80%. The subtracted amount is then applied to each sequential year.

For example, a computer you spend $2,000 on will be worth $1,600 after a year of use. After another year, you’re down to $1,200. After another three years, your computer is virtually worthless. Keep this in mind when deciding between the two policies.

Your equipment and property deserve the best protection money can buy and we will do everything in our power to ensure that your demands are met. If you have any further questions about replacement cost coverage vs actual cost value or would like to speak with one of our representatives, please do not hesitate to give us a call at 212-777-7113. We look forward to hearing from you!