What does 'full replacement cost' mean in property insurance?

'Full replacement cost' in property insurance refers to the amount it would take to replace or repair the damaged property with a similar item of equivalent quality without deducting for depreciation. This concept is crucial for policyholders because it ensures that in the event of a covered loss, they will receive compensation that reflects the current cost of replacing their property rather than its depreciated value.

This ensures that the insured can restore their property to its pre-loss condition without being penalized for wear and tear or age. For example, if a roof is damaged, the policy would cover the cost of a new roof of the same quality, rather than the current depreciated value of the old roof.

This clearly differentiates ‘full replacement cost’ from other terms such as market value, which considers what the property would sell for on the market at the time of loss, or the original purchase price, which does not account for any changes in value or construction costs. The focus of ‘full replacement cost’ is purely based on the cost of rebuilding or replacing without depreciation impacting the payout amount.