Principles Applicable to Claims for Recovery on a Replacement Cost Basis

In concept, replacement cost recovery restores the insured's business property to the same capacity it had on the date of the event causing physical loss or damage, while actual cash recovery provides the insured with a payment equal to the value of that property on that date. Each type of recovery must be assessed in light of the wording in the contract, which can vary in a number of respects. Generally, replacement cost exceeds actual cash value, which is calculated by deducting depreciation and any other stated factors from replacement cost. Absent an unusual wording, the replacement cost recovery is not available unless the property is actually replaced within a stated or reasonable period after the loss or damage occurs. This result follows from the concept that the “insured is not entitled to the full replacement value of an item until he proves that he has, in fact, replaced that item.” See Dickerson v. Lexington Ins. Co., 556 F.3d 290, 296 (5th Cir. 2009). As with many other areas of insurance law, courts seek in this area to determine and apply the intent of the parties embodied in the specific contract language, consistent with the equitable considerations that flow from that intent, though the analysis of these concepts is often colored by whether the insurance at issue is for a commercial entity or, e.g., an individual homeowner, and precedent in this area must be reviewed with that lens in mind.