What is meant by 'replacement cost' coverage?

'Replacement cost' coverage refers to a type of insurance that provides compensation for the cost of replacing damaged or destroyed property without taking into account any depreciation. This means that if an item is damaged, the insurer will cover the full cost to replace it with a new item of similar kind and quality at current market prices, rather than providing a payment based on the item's depreciated value.

This distinction is important because it ensures that policyholders can fully recover from losses without losing value due to age or wear and tear. In contrast, other types of coverage, such as actual cash value coverage, factor in depreciation, which can lead to lower payouts. Therefore, replacement cost coverage is especially beneficial for policyholders who want to maintain their standard of living after a loss by receiving adequate funds to purchase a new replacement item.