A new-for-old insurance policy is sometimes referred to by the related concepts of reinstatement or replacement value insurance. This type of insurance covers the full cost of repair, or replacement of a lost or damaged item, as opposed to its depreciated current value. New-for-old insurance makes sense for household contents insurance because in the event that you ever do need to file a claim following a devastating loss, you probably won’t be looking for just the market value of your old possessions; instead, you’ll be trying to scrape together enough money to actually replace them.
There are important distinctions between new-for-old insurance and what is often referred to as indemnity-based insurance policies that people searching for a good insurance policy should be aware of. Contents Insurance, a UK company, explains that new-for-old insurance covers the full replacement of “your old, damaged belongings with brand new versions. “This means that insurance coverage will be equal to the amount of money required to purchase new, at current prices, items which can fulfill effectively the same function for which you were relying on items that have been stolen, destroyed, or damaged beyond repair through some act or disaster covered by the insurance.
The reason this is important, as some homeowners unfortunately have to find out to their surprise, standard insurance policies don’t necessarily guarantee replacement value for lost items. Instead, many policies provide only what is known as “indemnity” coverage. What the insurance company means by that, writes Allan Manning and Peter O’Brien for the National Insurance Brokers Association, is that it will pay out the market value of the items. Typically, that won’t be enough to actually replace them. Instead, it will be the amount paid for the items when they were new after subtracting some amount for depreciation. Depreciation refers to the decline in value caused by age and by wear and tear.
New-for-old contents insurance typically costs more than indemnity insurance in those jurisdictions where it is legal for insurers to sell either. In this case however, the more expensive option probably actually makes more sense for most people. the reason is that when you insure your possessions, it’s usually because you’re guarding against the financial disaster you would suffer if you lost everything and had to purchase new replacements – new furnishings, new appliances and so on. Most of these possessions are not investments from which the owner has extracted some value and that he or she can afford to write off.
Since the goal of property owners will probably be to go out and purchase replacement items, it makes sense that an insurance policy should be geared towards covering the price of those replacement items, rather than the estimated value of the items that have been lost.
When taking out a new-for-old insurance policy, as with other types of insurance policies, it is important to carefully inventory the high-value items which you would want to replace, and make sure that the policy is large enough to cover your potential costs. The policy will have a total limit beyond which the insurance company may not compensate you, even if you need more money to completely replace everything that has been lost.