There are many ways your insurance company can go about calculating the amount you will get paid in the unfortunate circumstance that you have an insurance claim. The two most common ways are referred to as ‘actual cash value’ and ‘replacement cost’. The price you pay in premium is dramatically different between the two coverages and so is the amount the insurer will pay out when a claim does occur.
Actual Cash Value
Actual cash value refers to an insurance policy that covers your property and some possessions for and agreed upon fair market price at the time they are lost or stolen. Since the items are damaged in the claim are used, “market value” means that depreciation will be factored in when your insurance company pays you for your claim.
Replacement cost refers to the amount it costs to replace what is destroyed. This policy will pay out a substantially larger amount than an actual cash value policy. This is because a replacement cost policy will pay to tear down a piece of property, haul off the damaged material and repair or rebuild the property to its original state. If the construction costs are higher now the policy will pay for the difference.
When a catastrophe happens, many business owners are happy they secured a replacement cost policy. For some business owners, the difference between the two policies can be the difference between keeping the business open and being for to close the doors for good. I strongly recommend you consider purchasing a replacement cost policy. At the very least you should have an honest conversation with your insurance professional about what risks your business faces and how much risk you are comfortable taking on.
Now a replacement cost policy does come at a substantial cost. The premium is substantially more for a replacement cost policy compared to an actual cash value policy. For new businesses just getting on their feet, an actual cash value policy is the only option because of their financial situation. This can also be the case for seasonal or cash strapped businesses. If this is the case, do not just settle for a lesser policy. Talk with your insurance professional about the difficulties you are facing to properly in sure your business. Many times they can find find a different policy or a different payment method to benefit you unique needs.