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Suppose I have some property and want to insure it against fire. The purpose of the insurance is to let me get a new comparable sample of such property in case it is destroyed by fire.

The problem I see is the following.

On one side, if the piece in question is not new its market value is lower than that of the new equal or similar property, so if I insure it for the marker value and it is destroyed I won't get enough money to buy new one.

On the other side if I insure the property for the value of new sample I could be tempted to initiate a fire in some creative subtle hard-to-detect way so that I'm paid and can buy a new sample for replacement (in fact making the insurance company pay for renewal of my property).

How is this issue addressed in insurance? Is insuring for more than the property is currently worth allowed?

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You can't insure for more than the financial cost of the event that you're insuring against, but that can be more than the current market value of the item. If you'd need to buy a new one, then that's your financial loss. New-for-old cover is common for property insurance.

  • What about me being tempted to initiate a fire to get a new item instead of aged one? – sharptooth Jan 19 '11 at 12:06
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    Then you'd go to prison for arson and fraud. It tends to be a sufficient deterrent for most people. – Mike Scott Jan 19 '11 at 12:56
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    +1 Appraisals almost always cover the "replacement cost" instead of the current sale value. – C. Ross Jan 19 '11 at 13:29
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    Also remember that you are insuring the property, not the land that it sits on. Depending on location, that could be significant. Replacement cost is generally repair or demolition/reconstruction, not the cost of buying a new property somewhere else. – KeithB Jan 19 '11 at 14:22
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    Also keep in mind that the policy needs to be underwritten appropriately. If you live in a late 19th century brownstone with ornate woodwork, and want it replaced in the event of a fire, you're looking at a policy with provisions to do historical restoration. – duffbeer703 Jan 24 '11 at 0:48

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