In the insurance industry, replacement cost is the amount the insurance company will pay to replace the car if it is damaged or stolen. No matter how old or used the car was at the time of loss, the insurance company will pay the vehicle's original price.
Some people carry insurance which replaces stolen or damaged cars with actual cash value (ACV). They mistake this type of coverage for replacement coverage when it actually represents a completely different value. ACV takes depreciation into account and only gives the policy owner the current market value of the car. Replacement cost, however, is not determined by how old the vehicle was at the time of loss but by how much it would cost to buy a brand new model to replace it.
High End Vehicles
Replacement cost coverage especially benefits those with high end vehicles. If someone wrecks an expensive vehicle and still owes money on the loan, ACV coverage may not come close to the remaining loan amount. This could leave owners with a large deficit. Replacement cost coverage, however, gives high end vehicle owners more financial security in case of an accident. They know they can at least pay off their loan before replacing their car.
Replacement cost coverage also covers the cost of any vehicle repairs after an accident. Depending on the extent of damage to the vehicle, replacement coverage will pay either the cost to repair it or cover the price of a new car.
Not all vehicles or drivers qualify for auto replacement coverage. Some companies place restrictions on vehicle age. For example, some insurance companies do not offer replacement coverage for vehicles more than three years old. This way, the replacement cost doesn't exceed the car's actual market value. Most companies, however, offer replacement coverage even to those who aren't the original owners.