Actual cash value vs. replacement cost in commercial property business insurance: Which is better?

Actual cash value vs. replacement cost in commercial property business insurance: Which is better?

Matt Crawford
By Matt Crawford
Oct 16, 2023
1 min read

If you’re choosing a commercial property insurance policy to help protect your small business against the loss of repairs or damaged property, you have a big decision to make. Should you choose a policy that includes actual cash value or replacement value coverage for damages?

To help you decide, read this guide to understand actual cash value and replacement value and how they affect monthly premium, and help you understand how to file a commercial property coverage claim.

What is actual cash value in commercial property insurance?

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 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 for business, including equipment, inventory and furniture.

If you have commercial 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. With 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. Insurance will not cover 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 why NEXT only offers replacement cost commercial property coverage.

What is replacement value in commercial property insurance?

Replacement value 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 exercise bikes. With replacement value commercial property coverage, insurance could reimburse you for the cost to buy new bikes up to your policy limit.

Depreciation is not considered when determining the replacement cost of a piece of business equipment.

To file a claim for the full replacement cost — minus any deductible — 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 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 business property value

Two types of property that may be covered under commercial property insurance:

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

2. 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 value 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.

To repair or replace a commercial building, determining the value is a little more difficult. Replacement costs for buildings include the price of labor and materials to make the necessary repairs or rebuild.

Cost can vary significantly based on your location. Your insurance company can help you get accurate estimates from local contractors.

How to file a commercial property insurance claim

Preparing for a commercial property insurance claim starts before you file. Keep a list of everything your business owns — 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 on everything you buy for your business, so there’s no question about what needs to be replaced if you experience a loss.

Learn how to file a claim with NEXT.

Why NEXT only offers replacement value on commercial property

NEXT likes to keep things simple. Replacement value policies are the fastest way for your business to get your damaged property replaced so you can go back to work.

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

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 only be reimbursed for gear, equipment and inventory in a similar condition to your property immediately before the loss occurred.

How NEXT protects small businesses with commercial property insurance

When you get commercial property insurance with NEXT, you’ll have coverage up to your policy limit to replace your business property if it’s 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.

Start a free quote with NEXT today.

Matt Crawford
About the author

Matt Crawford leads NEXT's content team. He's a small business insurance specialist and has worked with business owners throughout his career as a community journalist and content marketer.

You can find him at one of his many favorite local restaurants in the San Francisco Bay Area when he's not at work.

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