While most people understand the basics of insurance coverage, few take the time to determine exactly how their insurance company calculates the reimbursement under their policy. There are several different calculation methods that insurance companies can use to arrive at your reimbursement amount. Your policy details should tell you what method is used with your policy, or you can ask your insurance agent. Here's a look at the basics of them so that you know what to expect if you have to file a claim.
If your policy lists actual cash value as the reimbursement amount, you'll receive what's considered the fair market rate for the item. This means that your payment would be the equivalent of the amount that you could expect a private buyer to pay to buy that item in its pre-loss condition.
Sometimes, cash value is calculated according to depreciation. This means that the insurance company starts with the like-new price, then deducts an amount that accounts for wear and tear as well as age. You'll receive the difference between the like-new price and the depreciation amount.
Some insurance policies are based on the replacement cost of the item. In those cases, you'll receive an amount that's equal to what you'd pay to buy another one in the current market. For example, if you have an old console television stolen, the insurance company would determine how much you'd pay to get another console television. Opting for a replacement cost policy is definitely to your advantage. It ensures that you get enough to replace your items with brand new ones, so you don't lose money for depreciation.
The book value payment method is less common, though still used by some insurance companies. This method starts with the full cost of the item in question, then that value is reduced using a depreciation calculation that depends on the useful life of the machine and its estimated value at the end of life. For example, if you lose an item that was worth $5,000 when you bought it and has a five year lifespan, you'd estimate its value at $1,000 per year of life assuming that it is not worth anything when it reaches the end of that lifespan. That means you'd receive $3,000 if it was stolen or destroyed when it was two years old.
Understanding the reimbursement methods may help you to better understand how much you can expect for your claim.