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Which loss settlement option is best for me?

Insurance is designed to help replace damaged stolen or destroyed property. While its purpose is pretty straightforward how that works in reality is a little more complex. The fact that you bought that limited edition ultra-high-tech camera for $10,000 does not mean your insurer will automatically hand you a $10,000 cheque if the camera is stolen or damaged. Instead the payout you will receive depends on the loss settlement option you choose . “What’s that?” you might ask.

Put simply loss settlement refers to how insurance companies determine the amount of money you will receive after you suffer a loss to an insured item.

As with most aspects of insurance loss settlement is dependent on certain factors. Insurance companies have different methods of calculating the value of something and hence the amount to be paid out. Differences in coverage and the method of calculation used means the amount paid for the same items will vary depending on the loss settlement option you choose.

This probably raises the question in your mind: “which loss settlement option is best for me?” To answer that question let’s first take a look at the types of settlement options available to you.

Typically loss settlement is decided in one of two ways: replacement cost or actual cash value . With these two options you could either be reimbursed for the cost to replace the lost or damaged item or for its actual cash value depending on what your policy says.

Replacement Cost (RC)

The replacement cost takes into account the cost of replacing a damaged asset at today’s cost i.e the insurance company pays you the same amount you would pay to buy that same item today. This option does not factor in depreciation which is the decrease in the value of an item due to age or wear and tear.

Replacement cost is like new for old – you have a 40 inch Sony TV that you bought 5 years ago with replacement cost you get to go and buy a new 40 inch Sony TV replacement of the same kind and quality.

Actual Cash Value (ACV)

The actual cash value (also known as the ‘Market Value’) loss settlement option is determined by the current value (worth) of your property not how much it would cost to replace it with a brand new one. This option factors in depreciation which means the insurance company would pay you the amount you would pay for a similar item at today’s cost minus depreciation.

An example would probably make it easier to understand. So let’s say that $10,000 camera we mentioned earlier was bought in 2010. You insured it at replacement cost and now it’s stolen or damaged. You check online and discover that the same camera now sells for $11,200. This is the amount you can expect to receive from your insurance payout with the replacement cost settlement option.

On the other hand if you insured it for actual cash value your payout will be less. Why? Because you’ve had the camera for eight years and due to age wear and tear it has depreciated in value by $4,000. It is no longer worth the $10,000 you paid when it was new and certainly not worth the $11,200 it now costs to replace it. Your insurer will calculate your payout by subtracting the amount of depreciation from the cost today and so your payout will be $11,200 – $4,000 = $7,200

Here’s another way of looking at it: The valuation looks at what could you buy that same 8 year old camera today (if you could find it). You could buy the exact 8 year old camera today for $7,200. “What’s my 8 year old camera worth today if I were going to sell it to someone” is a good way to look at actual cash value loss settlement clause.