Two policies, the same fire, and two very different cheques.
One pays what your equipment is worth today after years of use. The other pays what it costs to buy the same thing new. The difference is one phrase on your declarations page, and almost nobody reads it until the claim.
Start a quote file Read the short answer firstReplacement cost, or actual cash value.
Replacement cost often only pays if you replace.
Under-declare the value and the claim is cut.
What is the difference between replacement cost and actual cash value?
Actual cash value pays what the item was worth on the day it was destroyed, which is the replacement price less depreciation for age and wear. Replacement cost pays what it costs to buy the same item new today, with no deduction for age. On a fifteen-year-old production line those two numbers are not close, and which one your policy uses is decided by a single phrase in the property section rather than by anything about the loss.
Most commercial policies in this market are written on replacement cost, so owners assume it is automatic. It is not. Replacement cost usually pays on a replacement-cost basis only if you actually replace the item. If you take the money and do not rebuild, most wordings settle at actual cash value instead. That single condition has ended more arguments than any other line in a property policy.
Depreciation is the obvious gap and it is rarely the biggest one. The larger gap is the declared value itself. Property is insured for a figure you supplied, and that figure was usually set the year the equipment was bought and then carried forward at renewal without anybody re-costing it. Construction prices, freight and machinery costs have all moved since. When the declared value is materially below what the property would actually cost to replace, a co-insurance or average clause reduces the payment in the same proportion, and it does that on a partial loss too. You do not need a total loss to feel it. A fire that damages a third of a plant is settled against a value that was never right.
Four questions the adjuster asks before anything is paid.
Which basis of settlement applies
Replacement cost or actual cash value, and whether the wording restricts replacement cost by the age of the item. Some policies drop older equipment to actual cash value automatically, and some drop a roof or a building system but not the rest. It is one paragraph and it is worth reading before you need it.
Whether the declared values hold up
Buildings, stock and equipment are each tested against what they would really cost to replace. If the declared figure falls short of the percentage the clause requires, the payment is reduced by the same proportion. Honest under-declaration is treated exactly the same as careless under-declaration, because the clause does not ask why.
Whether you are replacing
Replacement cost settlements are generally paid in two parts. Actual cash value comes first, and the balance follows once the work is done and invoiced, usually inside a time limit written into the policy. A business that decides not to rebuild, or that misses the deadline, keeps the first part only.
What the rebuild has to comply with
You rarely get to rebuild exactly what burned. Current building requirements, electrical standards and environmental rules apply to the new work, and the extra cost of meeting them is not part of replacing what you had. By-law or building code upgrade cover is a separate item, and older buildings are where the gap is widest.
Three shortfalls that had nothing to do with the fire.
The value that never moved
The schedule listed the plant at the figure set when the business bought the building. Nobody revisited it, because nothing at renewal asks you to. Replacing the same square footage now costs materially more. The co-insurance clause applied, the settlement was reduced, and the reduction had nothing to do with how the fire started.
The machine that is no longer made
Replacement cost assumes you can buy the same thing. When a machine has been out of production for years, the honest replacement is a current model that costs more and needs different power, different footings or different guarding. Which of those costs are part of replacing the machine and which are an upgrade is a question worth settling with your broker before a loss, not during one.
The costs that sit outside the value
Debris removal, professional fees for drawings and permits, and expediting expense to get a critical machine moved to the front of a queue are all real costs of getting back into production. Each is a separate extension with its own limit. A policy can carry a perfectly adequate building value and still leave a business paying for the clean-up out of its own account.
The ones worth asking before the renewal, not after the loss.
How do I tell which basis my policy uses?
Look at the property section of the declarations page for the words replacement cost or actual cash value beside each item. They can differ between building, equipment and stock on the same policy, so check all three rather than the first one you find. Send us the page and you will get a written answer on what each line means.
Is an appraisal worth paying for?
For a plant or a building of any size, usually yes. A current appraisal moves the value discussion from an argument into a document, and it is the cleanest defence against a co-insurance reduction. For smaller premises a costed review with your broker at renewal is often enough. Either way the point is that somebody has actually re-costed it recently.
What about stock? It changes every month.
Stock is usually insured on a value that reflects your cost rather than your selling price, and the figure needs to reflect your peak rather than your average. A business that declares its January stock and holds four times as much in September is under-insured for most of the year. Reporting or peak-season arrangements exist for exactly this and are worth asking about.
Does insuring for more than the value get me more back?
No. Property insurance is a contract of indemnity, so it pays the loss and not the sum insured. Over-declaring costs you premium and returns nothing. The goal is an accurate figure, not a large one, which is the part that surprises owners who assume a bigger number is safer.
Our equipment is leased or financed. Does that change anything?
It changes who has to be named and often what basis the lender or lessor requires. Finance and lease agreements frequently specify replacement cost and require the lender to be shown as loss payee. Send the agreement with your policy and we will tell you whether the two match, because a mismatch is usually only discovered when someone asks for a certificate.
Not the question you had? Send your declarations page and the question with it through the quote file and you will get a written answer, not a sales call.
Bring the schedule to one appointment and settle the numbers.
Values, basis of settlement and the extensions that sit outside them. An hour of work that decides what a claim is actually worth.