Personal property replacement cost coverage

What is personal property replacement cost coverage?

Replacement cost coverage for personal property is an endorsement that pays to replace damaged or destroyed items at today’s prices rather than depreciated values, as Brenda Wells, chair of the Department of Finance & Insurance at East Carolina University, explained. Expensive items will be replaced with a new version, rather than their lower actual cash value, which is the standard coverage without the endorsement.

“Replacement cost coverage pays for the full replacement cost of an item in today’s dollars,” she said. “For instance, suppose you have a leather jacket that is ten years old. Let’s assume this jacket came from a designer boutique. Replacement cost insurance would allow you to go buy a brand new one today at a designer boutique.”

Personal property coverage is part of your homeowners, condo or renters insurance. While homeowners and condo insurance include other coverages for structural aspects of your home, renters insurance is mainly designed to protect personal property.

Feature	Actual cash value	Replacement cost value
Payout basis	Cost to buy new today minus depreciation	Cost to buy new today
Claim cost to you	Difference between ACV and cost to buy new, deductible	Deductible only
Cost of insurance	Included in standard policy, no additional charge	Requires endorsement, extra $50-$100 a year
What it covers	All personal property up to limits and sub-limits	All personal property up to limits and sub-limits

Do you need replacement cost coverage for your personal property?

Yes, you need personal property replacement cost coverage if you want to replace your property with new items of like kind and quality in the event of a claim. ACV coverage pays about 25 cents on the dollar versus replacement cost, Wells said, leaving you to cover the remaining 75% of the cost to replace your items.

“You almost always need replacement cost coverage,” Wells said. “ACV usually pays [around] 25 cents on the replacement cost dollar. So, if you lose everything you own, and it would cost you $100,000 to get all new things, your ACV policy will pay you around $25,000. That’s not enough to recover from a loss and get back on your feet. I always recommend replacement cost coverage.”

With replacement cost coverage, it doesn't matter what you originally paid for the item, or even if it was a gift, you'll get enough back to buy a similar item brand new at today's price.

“The beauty of replacement cost coverage is it works in today’s dollars and in today’s market,” Wells said. “What you paid for it is irrelevant. It could have been a gift or something you inherited, but you still get to replace it with a new item today. So, after a fire or other disaster, you can replace your belongings, get back on your feet and move on with your life.”

Here's an example of the total payout for items destroyed in a fire for a policy with ACV vs. one with replacement cost coverage, both with a $1,000 deductible.

Actual cash value vs. replacement cost claim payout for personal property
Item	Cost to buy new	Actual cash value (75% depreciation)	Replacement cost
55" TV	$2,000	$500	$2,000
Leather sofa and loveseat	$6,000	$1,500	$6,000
Large area rug	$1,000	$250	$1,000
Home theater speakers	$800	$200	$800
Total ($1,000 deductible)	$9,800	$1,450	$8,800

When do you need a personal property replacement cost endorsement?

You need an endorsement for personal property replacement cost on standard (HO-3) homeowners, condo (HO-6) and renters (HO-4) insurance policies, which provide ACV coverage for personal property. The endorsement changes the coverage to replacement cost.

“An endorsement is just a contract addendum that changes coverage,” Wells said. “Many homeowner forms provide ACV coverage, so it’s very common to purchase the replacement cost endorsement to add on to the policy.”

There are some types of home insurance policies that include replacement cost coverage. HO-5 policies offer increased protection for more high-value items and also offer replacement cost coverage. HO-5 policies are geared toward higher-value homes with a lot of valuable property, so they do not apply to every home.

You can also add an endorsement specifically for high-value items in your home, such as musical equipment or jewelry. Scheduled personal property endorsements cover damage from fire, vandalism, and theft and will even replace lost items.

How much is replacement cost coverage on personal property?

Adding personal property replacement cost coverage costs between $50 and $150 a year, depending on the amount of coverage you have on the policy. Higher coverage limits will increase the cost of the replacement cost endorsement. The difference, Wells said, is minimal, and without it your belongings will be underinsured.

“There’s really not too much of a difference in the premiums in most cases…it’s not enough savings to justify underinsuring your belongings,” Wells says.

How to calculate the replacement cost of personal property

To calculate the replacement cost coverage you need, create a home inventory and document it with photos and video. Estimate the cost to replace all of your belongings, at today's prices.

“I suggest you go through your belongings and make a video of them,” Wells said. "Open closets and cabinets, and film the contents. Then sit down and create an inventory of your property. You don’t have to list every plate or pair of socks, but you do need to compile a list of all your property and its replacement cost. You want enough coverage so that you can replace your things and get your life back in order after a disaster.”

Wells recommended calculating the cost in today’s dollars to replace those items, not what you paid for them. Don't underestimate the value of an item because it's older.

“Purchase price is irrelevant, and the only thing that matters is what it would cost you to replace it,” Wells says. “It is a very common mistake to underestimate this amount. People look at an older sofa or some well-used cookware as ‘not worth much’ because it’s older or a bit worn. That is a huge mistake.”

In addition to pictures, videos and lists, receipts and serial numbers are a great way to document all of your belongings and will make filing a claim go more smoothly.

What are personal property replacement cost coverage limits?

For personal property on a home insurance policy, the coverage limit is usually 50-70% of your dwelling coverage limit. That means if your dwelling coverage is $500,000, you would have $250,000 to $350,000 for personal property limits. On a condo or renters policy, you choose the personal property coverage limit based on your estimate of the value of your home's contents.

You can increase your personal property coverage on any home policy, but adding the replacement cost coverage endorsement is the only way to ensure the policy will pay the full amount to replace your items with new ones.

What is a personal property replacement cost loss settlement?

The loss settlement for personal property is how much the insurance company pays for your claim. It is the total calculated value of your items, based on the cost to buy each item brand new. In a replacement cost claim, the insurance carrier will send a check for the actual cash value, which is the depreciated value. Once you submit all your receipts, you will get a check for the difference. This is called recoverable depreciation, the standard method for paying replacement-cost claims.