Replacement Cost vs. Actual Cash Value on Commercial Property

Property5 min read

What each term means

Replacement cost pays to replace damaged property with new property of like kind and quality, without deduction for depreciation. Actual cash value pays replacement cost less depreciation. On an older roof or dated equipment, that difference can be most of the claim.

Coinsurance is the trap

Many commercial property policies include a coinsurance clause requiring you to insure at a stated percentage of value. If the limit falls below that, the insurer pays only a proportion of the loss — even a partial loss well under the limit. Understated values quietly create this.

Values drift over time

Construction costs move, and limits carried forward from an older policy fall behind. Reviewing stated values periodically is what keeps the coinsurance clause from becoming a penalty.

Ordinance or law coverage

Rebuilding an older building often triggers current code requirements that cost more than a like-for-like rebuild. Ordinance or law coverage addresses that gap; without it, the shortfall is yours.

Deductibles in Florida deserve attention

Wind, hail, and named-storm deductibles are frequently a percentage of the building limit rather than a flat amount. Increasing the limit also increases that deductible — worth modelling before renewal.