Understanding replacement cost coverage

Written by the Square One team

Reviewed by Rena Novotny

Updated July 15, 2024 | Published February 18, 2012

Replacement cost coverage is an important aspect of home insurance. It’s easy to get overwhelmed with different forms of coverage, but replacement cost is actually quite simple: it’s the cost of replacing your stuff.

On this page, we’ll explain replacement cost coverage and how to decide how much coverage you need.

Rebuilding a home

The important points

  • Replacement value means the cost of replacing an item with a new item of similar kind and quality.
  • Replacement cost coverage will pay to replace damaged property based on its replacement value, rather than its cash value.
  • When settling a claim, the policyholder may often choose to replace some property or take a cash value settlement instead.

Replacement value vs. cash value settlements

Let’s start with the basics: what is replacement cost?

Insurance pays to repair or replace stuff, like your house or the possessions inside. There are several methods that insurers use to calculate the value of a claim settlement, and replacement cost is one. The other main method is cash value.

Replacement cost is the cost of replacing a damaged item with a new one, of similar kind and quality. Cash value is most easily understood as the market value of an item: a beaten-up old sofa is worth less in cash, but an antique china cabinet is worth more.

Most home insurance policies insure your property on a replacement cost basis. However, you usually also have the option of settling for cash. Every policy approaches this differently, so check your policy wording for the section speaking to the “basis of loss settlement.” Within that section, you should find an option for replacing or repairing the property, or taking the actual cash value instead.

If you choose to use the actual cash value option, the insurer will typically calculate the value based on the replacement cost minus depreciation. While this may be less than the full cost of replacement, a cash settlement might be much better for you than replacing an item you no longer need or want.

Completing a home inventory

Completing a home inventory accomplishes a few things for you:

  • You will establish the cost of replacing all your stuff. This helps you avoid accidentally purchasing too much or too little contents coverage.

  • You will create a record of all of your belongings. This will come in very handy if you ever suffer a loss; and need to provide your adjuster with a list of things that were lost or destroyed. Instead of trying to imagine your home as it was, you’ll have a ready-made inventory list ready to go.

Creating a home inventory isn’t complicated. You’re basically just making a list of all your stuff.

But, there are a few extra notes you should take while you’re making it, not to mention a few tried-and-true methods for completing your inventory efficiently. Check out our home inventory guide for the full rundown.

How to choose the right amount of contents coverage

If you own a house, insurance agents traditionally will estimate the replacement cost of your home, and then set your coverage for contents at a fixed percentage of that amount. For instance, if you have a $500,000 home, you may automatically get 70% or $350,000 for contents, whether you need that amount or not.

Without completing an inventory, you won’t know if this amount is too much or too little for your needs.

At Square One, on the other hand, contents limits are a little different. Whether you’re a tenant, a condo unit owner, or a house owner, you can decide how much personal property you want to insure. If you only have $100,000 worth of belongings in a $500,000 house, no problem; that’s all you need to purchase. You can complete an inventory to verify the amount of coverage you choose, and if you wish, we can even keep it on your file.

To find out how much coverage you need, try our simple home inventory worksheet. It’s available as an Excel file that you can complete on your computer, or as a PDF file that you can print and complete the old fashioned way. We’ve divided our home inventory worksheet into categories, such as appliances, furniture, household accessories, electronics, and clothing. All you need to do is estimate the replacement cost of the items in each category, and you’ll have a good idea of how much insurance you need.

You may also want to take pictures or videos of every room of your house. Keep this with your home inventory worksheet somewhere away from your home. After all, if the worst happens, you want this list kept safe so you can refer to it when trying to figure out what’s lost or destroyed. Even better: complete the form, attach any photos, and store it online, in the cloud.

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Deciding whether to replace your personal property

You’ve completed a home inventory and determined how much it would cost to replace all of your belongings. You’ve made sure you have the right amount of insurance. But now, after you’ve suffered a loss, you realize there are some things you just don’t want to replace.

While most people do opt to replace the personal property damaged in a loss, sometimes you might choose not to:

  • Maybe you’re a retired business person, who no longer needs to wear a suit every day. Will you need to replace all those suits you had hanging in your closet?

  • Perhaps you’ve been hanging on to an old wedding dress for sentimental reasons. If it’s destroyed, will you really want another one?

  • If you’ve got older kids, do you think you’d want to replace all the toys and video games they’ve outgrown?

  • If your entire jewellery box were stolen, there were probably some pieces you were tired of and no longer wore.

This is where the replacement cost versus cash value settlements come into play. Your insurance provider won’t force you to replace everything. You can take the replacement cost settlement for the stuff you do want to replace, and take cash value for the remainder.

How Square One is different

With Square One home insurance, we go one step further to make this option useful to our customers. If an insured item can’t be replaced, or if you choose not to replace it, we can provide you with a limited depreciation settlement. “Limited depreciation” means that we deduct no more than 50% of an item’s replacement cost for depreciation; in many cases this provides a greater payout than policies that would fully depreciate items that aren’t repaired or replaced.

Replacement cost coverage

Customers who do choose to replace personal property often ask us how that process would work, and how much their policy will actually pay to replace an item. Home insurance policies from Square One provide replacement cost coverage. That means that our policy will pay to replace lost or damaged property with new items of similar kind and quality.

For example: if a fire were to damage a piece of your furniture, your adjuster would help guide you in identifying a similar new item, of similar size, shape, colour and quality.

Customize your policy limits to fit you

Square One’s fully customized home insurance policies allow individual customers to prepare for these situations in advance. No two people have the same taste in furnishing or personal effects, so we allow you to choose your own limits of coverage based upon your understanding of how much you would need to spend in order to replace your belongings with new items.

Want to learn more? Visit our Home Insurance Basics resource centre for dozens of helpful articles to guide you through the ins and outs of home insurance. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.

About the expert: Rena Novotny

Rena's 23-year career started as an independent adjuster where she specialized in complex property, liability and special risk loss. As a branch manager, Rena hired, trained, mentored and coached several adjusters. She continues part-time post-graduate studies in neuro-psychology and traumatization, learning how both may impact the insured's engagement on catastrophic claims. Rena has a MA (Conflict Analysis and Management), CRM, CIP, and holds a level 3 adjusting license.


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