Buying Enough Coverage

Before buying property insurance, you need to understand the difference between "replacement cost" and "actual cash value." Most property insurance policies contain replacement cost coverage on the building and actual cash value coverage on business property. Property insurance typically covers the business's building(s) and contents.

Replacement cost is the amount it would take to replace or rebuild your building or repair damages with materials of similar kind and quality, without deducting for depreciation. Depreciation is the decrease in building or property value since the time it was built or purchased because of age or wear and tear. In order to qualify for replacement cost coverage, the dwelling is required to be insured to at least 80% of the replacement cost.

The amount of replacement cost coverage available is limited to the amount of insurance you choose to buy. The coverage amount is stated on the declarations page of your policy. If you purchase an amount less than 80% of replacement cost of your home, your insurance company will not be obligated to pay the total cost of loss to your home even if there is a small loss. The "loss settlement" section of your policy explains how the settlement is calculated.

Actual cash value is the value of your property when it is damaged or destroyed. This is usually figured out by taking the replacement cost and subtracting depreciation. Contents coverage (for such items as furniture, television sets, and appliances) is usually on an actual cash value basis. For example if your office furniture is 10 years old and is destroyed in a fire, that costs $500 to replace may have a reasonable "life" of 20 years. If it is destroyed after 10 years, its actual cash value will be much less than $500, probably about $250.

Most polices pay for losses to your contents on an actual cash value basis, but a better option is the replacement cost coverage. Although the cost is higher, in most cases, the extra protection may be worth it. Replacement cost coverage is available for an additional premium.