Replacement refers to the substitution of one item with another similar item, without any deduction for depreciation being made. Replacement in insurance terms also means replacing old with new. In short term insurance the term replacement cost refers to the value of a piece of property as determined by the current or existing price of the same article – at today’s prices.

In car insurance most insurance companies will insure your car at the current market value and not its replacement value. The market value represents what you could get for your car if you sell it in an open market. The value or cars decrease rapidly and insuring your car at replacement cost will be very expensive.

There are some instances where cars will be insured at replacement value. This is usually the case when you insure a brand new car – should the car be damaged beyond repair and stolen within the first twelve months of cover the insurance company will replace your car with a new one. If the car has been damaged, insurance companies will look at a percentage damage of approximately 60% or more of the insured amount when deciding about replacement or repair. There will also be a limit on the number of kilometers travelled to qualify for replacement, usually 30 000 kilometers.