What type of insurance policy covers the current cost needed to replace the item insured?

The replacement policy is designed to cover the current cost needed to replace the item insured without accounting for depreciation. This means that if a loss occurs, the insurer would pay the policyholder the amount necessary to replace the item with a new equivalent, regardless of its previous value or condition. This is particularly beneficial for policyholders because it ensures they can restore their assets to their original state without incurring out-of-pocket expenses due to depreciation.

In comparison, an indemnity policy focuses on evaluating the actual loss suffered and compensating for that loss, which often involves considering the asset's depreciated value. The agreed value policy sets a predetermined value upon which compensation is based at the time of loss, which does not necessarily reflect the current replacement cost. A first loss policy, on the other hand, provides coverage up to a specified amount without the need to prove the full value of the loss, which may not accommodate the full cost of replacing the item in a loss scenario.