Replacement Value (Wiederbeschaffungswert)
Replacement value is the amount required to newly acquire an insured item of the same type and quality, without regard to its age or wear.
Concept
Replacement value is the amount required to newly acquire or restore an insured item at the same location, of the same type and quality, without taking into account the age, wear, or any diminished value of the damaged or destroyed item. In many lines of property insurance, particularly building and household contents insurance, it forms the relevant basis for determining the sum insured and the indemnity payable in the event of a loss.
Distinction from Actual Cash Value
Replacement value differs from actual cash value, which reflects the actual value of the item at the time of loss, reduced for age and wear; insurance on a replacement value basis – so-called new-for-old cover – ultimately places the policyholder in a better position, since they receive full restoration without any deduction for value in the event of a loss, though this typically requires a correspondingly higher premium.
Relevance for the Sum Insured
Because the sum insured is generally set based on the replacement value at the time the contract is concluded, periodic review and adjustment is necessary to avoid creeping underinsurance due to rising construction costs or inflation; many contracts provide for this through an automatic value adjustment via an index-linked replacement factor or a comparable indexation clause.