Most insurance policies provide for what is called "Replacement Cost" coverage. The alternative is to have a policy which only provides for payment of the "Actual Cash Value" of your damaged or stolen property. Replacement Cost policies have higher premiums but they are well worth it.
To cite an example as to how each policy would work, let's assume you have a stereo system stolen which you had purchased ten years ago for $500. In today's market, however, a stereo of "like kind and quality" costs $1,000. With a replacement cost policy, you would be entitled to $1,000 as that represents the "replacement cost" of the item stolen. If you only have an Actual Cash Value policy, you would not even receive the $500 you paid for the stereo ten years ago but, instead, would receive the stereo's depreciated value as of the date of loss. For example, that stereo might only be worth $200 in its used condition (10 years old, out of date components, etc.) so the insurance company would only owe you $200. Even if you had replacement coverage, most policies specify that unless you actually replace the item of personal property, you will only be compensated for the property's Actual Cash Value at the time of loss. Using the example of the stereo system above, your insurance company might initially pay you $200 for your stereo but, once you've replaced it for $1,000, the company will then pay you the additional $800. This process of "withholding" full replacement value until an item is actually replaced can obviously work to the policyholder's economic disadvantage. If the policyholder doesn't have an "extra" $1,000 to buy the replacement stereo, the $200 actual cash value payment by the insurance company won't allow the policyholder to replace the stereo which, in turn, can keep the policyholder from ever receiving the additional $800 that is to be paid only if the property is actually replaced. While insurance policies generally contain language which requires replacement before full reimbursement is to be paid, reputable insurance companies will "work with" their policyholders to avoid these "Catch-22" situations. This is especially true where the item in question is an item that the insurance company is confident will actually be replaced. For example, a policyholder who has owned and used a stereo his or her entire adult life is not an individual who is likely to suddenly forego having music in the future. In such a situation, the insurance company is not really "taking a chance" that it might be paying for the replacement cost of an item that would never actually be replaced.
Because there is absolutely no reason for the insurance company to believe that the policyholder won't buy another stereo system for their home, there is no reason for the insurance company to condition payment of full replacement value on actual replacement of the stereo system. As always, the insurance company has to treat your claim "reasonably" and it cannot put its foot down and rely upon policy language which, when literally interpreted, would lead to unreasonable or unfair treatment of its policyholder. Stated differently, policy limitations, exclusions, and the like are enforceable only if they are applied reasonably and consistent with giving the insured's interests at least equal consideration to the interests of the insurance company.
