Does the insurance company pay replacement cost if I don't replace
If you have replacement cost coverage, in order to receive the replacement value insurance policies
require that you replace the property in question. At first glance this may seem unfair, but with a
complete understanding of the rationale, it should make good sense to anyone.
One of the most basic principals of insurance is to return a customer to the same financial condition
they were in before they suffered the loss. Many times the replacement cost of property is greater
than the actual value of that item - such as a 15 year old 30" TV. A new 30" TV might cost $500.
But if you tried to sell the old one, you might only fetch $100. Generally replacement won't be
required for claims under $2,000 to get the full replacement value. But for larger claims, you will
have to replace the property in order to receive replacement value. Consider a home for example.
A brand new a home might cost $350,000 to build (excluding the land), but a home that is 30 years
old and in used condition and may only fetch $275,000 (including the land) if sold on the open
market. In this situation, the insured person would be financially better off if the house were to burn
to the ground - assuming they received full replacement value without having to rebuild. They
certainly couldn't have sold it for more than the $275,000 market value.
The traditional problem with an insured being potentially enriched is that there exists less incentive to
protect one's property from loss. This in turn would result in more claims, and for higher property
rates. In the end, it doesn't serve the best interest of the general public.
These explanations are intended to provide a simple understanding of some of the basic provisions
found in most insurance policies. Sometimes simple explanations do not address all of the particular
circumstances of a claim, nor may they take into consideration case law or other provisions within a
policy. This FAQ section of the website does not replace, alter or amend any language in your policy,
its terms, conditions or exclusions.
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