Replacement Cost vs. Actual Cash Value for Commercial Insurance

It’s not abnormal for businesses to experience property loss. Whether small or large, loss will most likely happen at some point in the lifetime of a business. As most businesses have some type of property that is used in the operation of the business, how do you determine the type of business property and its value? 

Every business needs various forms of insurance – even the smallest home-based businesses need some coverage. It’s important to note, your homeowner’s policy isn’t designed to cover activities that are done for a profit. Having coverage for an unexpected loss could mean the difference between getting back to business or being forced to close permanently.  

Understanding Real Property versus Business Personal Property 

Commercial property falls into two categories. They will either be determined as real property or business personal property.  

Examples of real property includes the land, buildings, and equipment or machinery that is a permanent fixture. They can’t be easily removed from the business’s premises. 

Business personal property is equipment or things that can easily be moved from one location to another, such as furnishings or electronics.  

Understanding Actual Cash Value versus Replacement Cost  

Actual cash value, or ACV, is calculated by an item’s fair market value at the time of the loss minus depreciation. Actual cash value will be less than what you paid for an item and less than it will cost to replace it.  ACV policies tend to be less expensive than replacement cost policies. 

Replacement cost coverage pays the amount it costs to replace the damaged property at the time of a loss with the same or similar value item. With replacement cost coverage your business will be able to purchase brand new items of equal quality. Depreciation is not a factor when determining the replacement cost of an item. 

In the event of a loss most insurance companies won’t give you money before you replace your damaged or stolen property. The business will likely need to repurchase the property first and depending on the type of coverage the insurance company will reimburse either actual cash value or replacement cost. Understanding the difference in coverage is an important consideration. Know what type of coverage you are purchasing before you have a claim. 

How can you know which reimbursement applies to you and your business, though? Here are some examples.  

Your computer is damaged by a loss or theft. The fair market value of that computer would be determined based on what it’s worth at the time of loss, then depreciation would be subtracted based on the age and wear and tear of the computer. This is actual cash value. 

For replacement cost, the same computer would be replaced with a brand-new computer with features and value as similar as possible to the original one. 

Know Your Policy’s Coverage 

Do you know if your small business policy offers actual cash value or replacement value? If you don’t know, or if you have further questions about either, contact us now!  

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