What does "replacement cost" coverage refer to?

"Replacement cost" coverage is a term used in insurance to describe a form of coverage that provides payment for the cost of replacing or repairing damaged or destroyed property with new property of similar kind and quality, without factoring in depreciation. This means that if a covered loss occurs, the insurer will cover the full cost to replace the item, rather than the item’s value at the time of loss considering depreciation.

This is particularly beneficial for policyholders, as it enables them to sufficiently recover from a loss and ensure they can acquire a new equivalent item, rather than only receiving the depreciated value of their old item, which would usually be lower. Thus, when selecting coverage types, understanding that replacement cost coverage will address the cost to obtain a new version of the same or similar property is vital for financial planning in the event of a claim.