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If you run a business, one of your biggest decisions is choosing the right insurance coverage. Also, if you’re like many business owners, you may have a hard time determining which type of policy is best for your company. When buying commercial property insurance, you have different options regarding coverage. You can choose “full replacement cost value” insurance or you can select an “actual cash value” policy. Here’s how these two insurance policies differ and why a full replacement cost policy may be the best option for a business.

What Is Full Replacement Cost Value? 

Simply put, “full replacement cost value” refers to how much money is needed for replacing a property with a new one that’s of the same quality and made of comparable material. In most cases, a full replacement cost commercial insurance policy works best for businesses.

Let’s say a thief breaks into your office and steals one of your fax machines. An insurance policy providing full replacement cost value would cover the cost needed to replace it with a similar one. It doesn’t matter if your stolen four-year-old fax machine had considerable wear and tear, such as dents and scratches. You’ll still receive full replacement cost for a new one. In other words, depreciation is not a factor.

What Is Actual Cost Value? 

Actual cost value (ACV) is the cost needed to replace an item with a new one that is like it and of the same quality. However, the depreciation cost is subtracted from the value of the item. Also called “market value”, ACV is the replacement cost minus depreciation. In other words, it’s the amount of money you would get for the item when selling it in the marketplace. For example, consider how used merchandise for sale on eBay is priced lower than brand new items.

Summary and Considerations 

  • Both types of policies are based on the current cost of what it takes to replace a damaged or stolen item with a new one.
  • The sole difference is that ACV deducts for depreciation, while a full replacement cost policy does not.
  • ACV can be somewhat complicated. It can be extremely difficult to determine the value of items that are one-of-a-kind. What’s more, often there’s the problem of determining depreciation for items that are now obsolete or no longer useful.
  • Generally, an ACV policy is less expensive, meaning the premiums are cheaper.
  • On the other hand, an ACV policy may not be the best choice if your business has been operating at the space for a while because you’re more at risk for depreciation, meaning you’ll receive less for your losses.
  • Although ACV policies have lower premiums, most business experts recommend full replacement cost value coverage over ACV policies.
  • Keep in mind how over a period of a decade, the cost you pay in premiums can be minimal if your business suffers from a huge financial loss and even needs to rebuild, such as recovering from a hurricane or another type of natural disaster.
  • It’s important to thoroughly review all the exclusions on an insurance policy, regardless of which one you choose. This is because examining the exclusions can help you decide if you need additional insurance.
  • If you’ve kept the same office space for several years, it’s critical you have your commercial property reviewed to ensure your policy is based on a correct valuation.
  • There are two types of property: real property and business personal property.
  • Real property pertains to land as well as outdoor fixtures, buildings, and permanent equipment and machinery. Business personal property refers to items you can move easily, such as office furniture, telephones, and computers
  • Do you have at least one business loan? If so, it’s essential you know the terms of your loans.
  • Consider that most lenders have the requirement of a business having a  full replacement cost insurance policy in their lending agreements. 

Selecting insurance for your home or business doesn’t have to be overwhelming when you let an experienced and highly trained insurance specialist help you make the right choice. If you’re unsure which type of commercial insurance policy is best for your business, please contact us. We work with a wide range of business, focusing mainly on single-person LLC’s in tech and small New Jersey businesses.