Commercial property insurance is one of the most important insurance policies for businesses with physical locations. It is often bundled with commercial general liability insurance to form abusiness owner’s policy. However, both insurance types can be purchased separately as well.
If you turn to a trusted insurance broker to put your business insurance together, the options will be endless. You can even select from the two types of commercial property insurance, which include:
- Actual cash value commercial property insurance; and
- Replacement cost commercial property insurance.
In this guide, we’ll talk about the fundamentals of these two types of commercial property insurance, as well as their differences. Choosing the best one for your business will be easier than ever.
Let’s get started!
What Do The Two Types of Commercial Property Insurance Cover?
The main difference between actual cash value (ACV) and replacement cost (RC) commercial property insurance is whether or not depreciation is taken into account.
Depreciation is a key consideration in an ACV commercial property insurance policy. Meanwhile, in an RC commercial insurance policy, depreciation is not considered when covered items need to be replaced. We’ll discuss this in further detail in the next section.
The above difference aside, all other coverage points are the same for the two types of commercial property insurance. Whether you are insuring a storage facility, brick and mortar store, an office, or other types of workplaces, commercial property insurance covers the following:
1. The Building or Space
Owned or leased commercial buildings/spaces are covered by the two types of commercial property insurance. If the structure is damaged by a covered peril, commercial property insurance will give payouts for repairs.
2. Office Equipment and Documents
Office equipment such as computers, printers, phones, network servers, furniture, contractor tools, etc., are covered by the two types of commercial property insurance.
Important documents, like blueprints, accounting records, etc., can be covered as well.
3. Inventory
Physical products, as well as raw materials, are shouldered in the event that they are stolen or damaged by a covered peril.
4. Employee’s Possessions
If employee possessions are damaged or subjected to theft, the two types of commercial property insurance offer coverage. As with the other replaceable items mentioned so far on this list, the amount of the payout depends on which of the two types of commercial property insurance you have.
5. Business Interruption
Business interruption coverage reimburses lost income if a commercial property needs to undergo repairs or if key items are still being replaced.
Business interruption is the only coverage point that does not change depending on the type of commercial property insurance you have. However, not all commercial property insurance plans have this coverage automatically.
Actual Cash Value vs. Replacement Cost Commercial Property Insurance
Commercial property insurance covers more than the building itself. As mentioned earlier, this type of insurance also covers office equipment, employee possessions, and inventory. All of which are subject to depreciation.
Depreciation is the reduction of a physical asset’s value as time goes by. It takes into account the wear and tear that items go through, as well as an item’s transition into becoming obsolete.
Commercial property insurance plans that pay out the present, actual cash value of an item will take depreciation into account. Meanwhile, insurance that pays out the replacement cost will cover the cost of replacing a damaged or stolen item with a similar item in the market.
Hypothetically speaking, the payout for actual cash value and replacement cost could be the same amount for an item if (and only if) the damaged item is newly bought, brand new, and unused. This is because the item wouldn’t have gone through depreciation just yet and its market price would still be the same. Therefore, the ACV and RC in this hypothetical scenario would be the same.
This shows how depreciation is truly the main differentiator between ACV and RC commercial property insurance plans.
RC commercial property insurance plans give business owners added assurance that covered physical assets will be replaced, without worrying about depreciation. For this reason, the premium of RC commercial property insurance is typically higher.
Here is a table that summarizes the key differences between the two types of commercial property insurance:
| Types of Commercial Property Insurance | Cost of Premium | Is Depreciation Considered? | What Does It Pay Out? |
| Actual Cash Value (ACV) | Lower | Yes | The actual cash value, which is typically calculated using this formula: ACV = replacement cost – depreciation |
| Replacement Cost (RC) | Higher | No | The full cost of replacing the stolen or damaged item with a similar item. |
Example of Actual Cash Value and Replacement Cost Policies in Action
To illustrate the difference between actual cash value and replacement cost commercial property insurance plans, here is an example:
- An office caught fire. The damage was extensive enough to destroy all the computers. This is a covered peril and the items are covered within the policy. All of these computers were bought five years ago.
If the business has an ACV commercial property insurance ⬇️ | If the business has an RC commercial property insurance ⬇️ |
The computers will be covered by the insurance company. However, considering they’ve gone through wear and tear in the past five years, the payouts would be based on the current, depreciated value of the computers. | The insurance company will shoulder the replacements. If the exact computer models are no longer available in the market, the policy will cover the purchase of new, equivalent models. |
Customized Commercial Property Insurance for Your Business
If you’re ready to protect your office, storage space, store, or building, we’re here to help! KASE Insurance is a Toronto-based, award-winning insurance brokerage firm that specializes in providing customized business insurance. Our team of experts can help you determine whether an ACV or RC commercial property insurance is best suited for your needs.
From there, we can put together an insurance policy fine-tuned to fully protect your business. Aside from helping you choose the best option among the two types of commercial property insurance. From coverage limits to deductibles, figuring out each detail of your insurance policy is easier than ever with our team.We’re here to make sure you get reliable, stress-free, and fully transparent business insurance. To get started, contact us today or request a FREE quote.
