Homeowners’ insurance policies cover losses or damage to real property and personal property resulting from named perils such as theft, flood, earthquake, fire, etc. In case of a casualty, theft or loss, insurance companies typically have the option to repair (or replace) the damaged (or lost) property.
While structures are most often repaired, personal property is typically neither repaired nor replaced; rather, in order to settle the claim the insurance company will usually pay the cash equivalent of the loss (in accordance with the insurance contract in effect).
Insurance contracts are intended to indemnify the insured (I.e., give compensation for the damages sustained) in case of loss. The purpose of indemnification is to make the insured whole again— neither worse off nor better off than before the loss. The amount of indemnification is specified in the insurance contract between the insurance company and the insured.
There are basically three types of personal property insurance:
The settlement amount specified in the insurance contract could be the property’s actual cash value (ACV) at time of loss or, by endorsement to the homeowner’s insurance contract, the property’s replacement cost (new), or by the addition of a personal property floater policy, the property’s market value (I.e., an agreed value).