In insurance terms, Replacement Cost is the cost at today's pricing needed to fully replace or restore an item such as a house, commercial building or personal property item.
It is extremely important that the person seeking to buy coverage works with a qualified agent to determine the full replacement cost value of their home or commercial building and only consider reduced coverage limits as a last resort. This is important when a loss is incurred as those properties with inadequate coverage amounts not only leave the insured personally exposed but also subject to Co-Insurance penalties.
As an example, when dealing with home owners insurance, if an insured declines 100% coverage that an agent is recommending, if a loss were to ensue, the insured is often times subjected to a co-insurance penalty in equal percentage to the amount that they were under insured.
Therefore, if a home is insured for 200,000 but should have been insured for 250,000 and a loss occurs, this means that the replacement cost payment for the damages incurred could be reduced by 25% which is equal to the amount that the home was under insured.
Agents try hard to adequately insure the property but often times people simply decide not to take their advise, resulting in a decision to become partially self insured and still maintain a deductible.
Replacement Cost Value also represents the maximum amount that the insurance company is willing to pay for damages incurred but some policies offer an increased 15% coverage to those insured's that elect to insure their property 100% to value. This increased benefit usually comes at no cost to the insured and comes in handy in the event of a total loss situation.
In my 30 year carrier, I cannot tell you the number of times that I have seen insured's suffer as a result of failing to insure their property 100% to value so maybe it is time to make an appointment with your agent and have an insurance checkup as well as to discuss your risk tolerance.