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What’s the difference between actual cash value vs. replacement cost for business insurance?

Matt Crawford image
By Matt Crawford
Feb 25, 2021 min read

When it comes to small business insurance, it’s most important to know the difference between actual cash value vs. replacement cost when considering commercial property insurance.

When you have a claim that involves repairing or replacing your damaged property, you will either have coverage up to your policy limit for:

  • The value of what was damaged at the moment of the accident. This is called the actual cash value.
  • The cost for replacing whatever was damaged. This is called replacement value.

Continue reading to dive into the details of both options, but first an important detail if you are considering coverage with Next — we only offer replacement value with our commercial property insurance packages. 

Why? We like to keep things simple, and replacement value is the fastest option for you to get what you need after your property is damaged so you can go back to work.

Ok, now let’s look at the specifics of actual cash value vs. replacement cost:

What is actual cash value?

The actual cash value of an item is how much it’s worth in its current condition, not how much you paid for it or how much it would cost you to buy it new today.

The difference in value between what you paid and what it’s worth today is called depreciation.

It’s what happens when you buy a new car. As soon as you drive it off the lot, it’s worth less than it was just a few minutes earlier when you paid for it.

The same thing happens with most of the stuff you need to do business, including equipment, inventory and furniture.

How actual cash value works with business insurance

If you have property insurance with actual cash value coverage, and you experience a covered event, your insurance will only reimburse the value of the property right before the loss occurred.

Let’s say you have a cleaning business, and your property is vandalized. Your five-year-old pressure washer is damaged beyond repair and must be replaced before you can help one of your top clients.

If you have an actual cash value policy, your insurer will reimburse you for the value of the pressure washer right before it was vandalized up to your policy limit — not the amount it will cost to buy a new one.

With an actual cash value policy, you may only receive a fraction of what it would cost to replace your property with new items.

This is one of the reasons why we only offer replacement cost coverage. We’ll explore more details in the next section.

What are replacement costs with business insurance?

Replacement cost is the amount you’d pay to replace damaged property with the same item or one of similar value.

Let’s say you own a fitness business and someone steals all the new exercise bikes you just purchased.

If you have replacement cost coverage, your commercial property insurance will reimburse you for the cost to buy new bikes up to your policy limit no matter how much they’re currently worth.

Depreciation is not included when determining the replacement cost of an item.

An important note about replacement cost with commercial property insurance

To get the full replacement cost — minus any deductible you owe — for property that’s damaged or stolen, it must be insured up to the amount it would cost to replace it.

If your policy limits are too low, you won’t get the full replacement cost if you need to file a claim. 

There may also be restrictions on the type of property that’s included under replacement cost coverage. For example, roofs can be excluded, depending on the age and where the building is located.

It’s important to read your policy carefully so you’re not caught off guard if you need to file a claim.

How to determine your business property value

Before you can determine the value of your property, it’s important to understand there are two types of property that may be covered under commercial property insurance:

Business goods, gear and inventory. This is pretty much anything you could pick up and put in a moving truck if you had to.

Structures. This is the stuff that’s more permanent, such as the building where your business is located.

If you have actual cash value coverage, the value would be the price you paid for it minus the amount it has depreciated since you bought it. 

If you have replacement cost coverage, you can check out prices online, in catalogs or at your favorite stores to find out how much it will cost to replace your property.

When repairing or replacing a commercial building, determining the value is a little more difficult. Replacements costs for buildings include the price of labor and materials you need to make the necessary repairs or rebuild.

Cost can vary significantly based on where you’re located. Your insurance company can help you get accurate estimates from local contractors.


Preparing for a property insurance claim

Preparing for a commercial property insurance claim starts long before you need to file one. 

To make sure you’re ready for a claim, it’s important to have a list of everything you own — from office supplies and computers to the commercial building that houses your business. Include a description of each item, its value and the date you purchased it. 

If you’ve made any improvements to your property such as putting on a new roof or remodeling the interior, be sure to maintain detailed records of the cost of the improvements.

Keep receipts of everything you buy for your business, so there’s no question about what needs to be replaced if you experience a loss. 

Plus, it makes processing your claim easier and faster. We strive to make claims decisions within 48 hours.

Bottom line: replacement cost vs. actual cash value

Replacement cost coverage provides more protection than actual cash value coverage. But it can also be more expensive because it costs the insurance company more if you need to file a claim.

If you can afford it, replacement cost insurance is typically the better choice. If you opt for actual cash value coverage to save some money on your premium, you must be willing to accept the depreciated value of your property if you experience a loss.

You won’t receive enough money from the insurance company to replace items. You’ll get something that’s in a similar condition to your property immediately before the loss occurred.

How to get commercial property insurance with Next 

When you get commercial property insurance with Next Insurance, you’ll have coverage up to your policy limit to replace your business property if it is damaged or destroyed.

We make it easy to get a quote, review options and purchase your insurance online in less than 10 minutes. 

If you have questions, our licensed, U.S.-based insurance professionals can help.

Get your free quote today.

Matt Crawford image
By Matt Crawford
Matt Crawford is Associate Content Director at Next Insurance and a small business insurance specialist.
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