What Is a Replacement Property?

Replacement property is any property that is received in place of property that has been destroyed, lost, or stolen. Replacement property can be personal or business property and can include various types of assets, such as real estate, equipment, and vehicles. Replacement property is often insured by a casualty-insurance carrier.

Key Takeaways

  • Replacement property refers to the assets paid by an insurance company when insured assets are lost or destroyed.
  • The insurer will attempt to replicate the original asset as closely as possible, though in practice, approximations must often be used.
  • Certain items, such as family heirlooms, are difficult to replace because of their intrinsic sentimental value.

Understanding Replacement Properties

The idea behind replacement property is to compensate an insured person for the loss of their assets. For example, if a person obtains car insurance and subsequently has their car stolen, they may be entitled to a replacement car provided that they met all of the relevant payments and clauses of their insurance contract.

Of course, not all cars are of similar value. The owner of a stolen Ferrari (RACE) would hardly be satisfied if their car was replaced by a mass-market sedan, for example. For this reason, insurance carriers seek to replace the lost asset with as close a replacement as possible.

In the case of the stolen Ferrari, the insurer would try to obtain the closest model of Ferrari available after adjusting for factors such as the age, condition, and approximate market value of the car. In some cases, the replacement property might be more valuable than the original that it replaced. In these instances, the recipient of the replacement property may need to pay taxes on the additional value of the new property received.

In cases wherein the insured item is particularly rare, finding an exact replacement may be impossible. This can occur not only in the case of rare or unique items—such as a valuable car for which only a small handful of copies were produced—but also for items of sentimental value.

A family heirloom, for instance, can be replaced, but its subjective value cannot be duplicated. Certain monetary products like stocks and bonds may not be able to be precisely replaced if those items are no longer in circulation or available for purchase. Likewise, original documentation cannot always be directly duplicated.

Real-World Example of a Replacement Property

Adam is a homeowner whose home catches on fire. Although the fire destroyed his home, Adam had thankfully insured his property and satisfied all the payments and conditions of his insurance contract. Because of this, he is entitled to receive replacement property of approximately equal value to his lost home.

In providing this replacement property, Adam’s insurance carrier will pay for his home to be rebuilt according to the standards that it enjoyed prior to the fire. For example, if the home had two bedrooms and two bathrooms, the same will be true for the newly-built home.

Although the replacement home is a good approximation for the original which Adam lost, the same cannot be said for all of his personal possessions. One of the items destroyed in the fire, for example, was the wedding dress of Adam’s wife. While the dress was also insured—meaning that his wife will be entitled to a replacement dress of approximately equal value—this replacement dress will not be able to replicate the emotional value of the original.