Property insurance can be purchased on the basis of the property’s actual value, on its replacement cost, or on an agreed amount. The differences between the three are:

Actual Cash Value

The replacement cost of the item minus depreciation. For example, a new desk may cost $500. If your seven-year-old desk gets damaged in a fire, it may have depreciated 50 percent. Therefore, you would receive $250 for the desk.

Replacement Coverage

Replacement coverage is the cost of replacing an item without deducting for depreciation. So today’s cost for a desk of a size and construction similar to the seven-year-old one damaged by fire would determine the amount of compensation. If it costs $500 today, then you would receive $500 for the desk under the replacement coverage.

Agreed Amount

Art objects, antiques and other unique items are usually insured at an amount agreed upon when the policy is being written. An appraiser values the goods to be insured and the business owner and the insurer agree upon an amount that the insurer will pay if the goods are destroyed due to a covered peril.

Check your policy. If you prefer replacement coverage and do not already have it, this coverage can be added to your policy. Inflation-guard coverage, which automatically increases your insurance amount a certain percentage, protects against rising construction costs. Your agent can advise you of the costs involved.