Difference between the actual value and the new-for-old replacement value in the event of loss or damage

When you take out an insurance policy, one of the most important aspects, which will determine how much will be paid out in the event of loss or damage, is the valuation criteria for the damaged material assets. There are two fundamental concepts: the new-for-old replacement value and the actual value.

It is on the basis of these that you may either receive compensation that will allow you to fully replace the damaged asset for a new one, or you may only receive the value dependant upon its age and condition. Understanding this distinction is essential so that you know what protection your insurance policy provides and avoid any potential surprises.

Below, we explain what the actual value is, what the new-for-old replacement value means, when each is applied, and how this difference can have a significant impact on the compensation you receive in the event of loss or damage.

What is the actual value?

The actual value, also known as the market value, is the amount that the insured asset would have just before the loss or damage took place, taking into consideration its state of repair, age, condition and accumulated depreciation.

To determine this, the following aspects are taken into consideration: time since purchase, condition, estimated lifespan, annual depreciation and remaining life, and price in the second-hand market. This methodology is contained in Article 26 of the Insurance Act.

The actual value applies by default in most standard policies when new-for-old replacement value coverage has not been specifically taken out. It is common in:

• Basic insurance where the premium is lower
• Assets that are several years old
• When the policy does not expressly include the new-for-old replacement value
• Items that have exceeded a percentage of their lifespan (normally 50%)

Imagine that you take out home insurance and your television set, which you purchased six years ago for €1,500, is damaged in a fire.

If your policy pays out the actual value:

• Original purchase value: €1,500
• Age: 6 years
• Estimated lifespan: 10 years
• Depreciation: 60%
• Actual value: €600

The payout will be calculated at €600, which is what your television set would be worth in the second-hand market. With that amount, it is unlikely that you would be able to buy a new, like-for-like television set.

What is the new-for-old replacement value?

The new-for-old replacement value, also known as the replacement value, is the compensation criteria that enables you to receive the amount needed to buy a new asset that is equivalent to the one that was lost or damaged, without applying depreciation due to age or use.

The concept of replacement value involves compensating the insured party with the amount needed to completely replace the damaged asset for a new one that is like it. The replacement is the current market cost of a new, like-for-like product.

Main features of new-for-old replacement insurance:

• Compensation according to the current market price of a new, like-for-like asset
• Depreciation is not applied
• It may have time limits 
• Specific conditions depending on the type of object and the purpose of the property (main or secondary residence).

Replacement value in insurance only applies when it has been expressly taken out. Normally in:

• Home insurance with premium coverage that includes this guarantee
• Assets purchased within a fixed number of years previously (between 5 and 10 years)
• When the asset was in good condition before the loss or damage

Returning to the example of the television set, with a new-for-old replacement value, its value would be:

• Original purchase value 6 years ago: €1,500
• Current value of the new, like-for-like model: €1,400
• Applied depreciation: 0%

In the event of loss or damage, you would receive €1,400, the cost to replace your television set with a new one. There is a significant difference between the two: with the actual value, you would receive €600, whereas with the new-for-old replacement value, you receive €1,400.

When is each value applied in the event of loss or damage?

The application of the actual value or the new-for-old replacement value depends on the conditions of the policy, the characteristics of the asset and the limits established by the insurer.

The actual value is applied by default with:

• Simple policies with lower premiums
• Older assets that are above the threshold (5-10 years, depending on what is stipulated in the policy)
• No specific coverage for new-for-old replacement
• Faulty condition of the asset due to lack of maintenance

For the new-for-old replacement value to be applied, the following conditions need to be met:

• Expressly named in the policy: it must appear in your policy’s set of conditions.
• Age limits: depending on the type of asset and the purpose of the property (for example, for furnishings in second homes, the limit is often 5 years).
• Proper condition: the asset needs to be functional and not be damaged before the loss or damage.
• Effective replacement: the payout is directed towards replacing the item for a new one that is like it.

Items excluded from new-for-old replacement (paid at the actual value):

• Clothing and sound and vision devices in second homes that are more than 5 years old (or 2 years old for clothing).
• Moulds, etching plates, designs and goods.
• Items that are unusable or that do not work.
• Valuable items: Gems, jewels, precious stones, works of art and collections (these assets do not depreciate with use, which is why they are treated differently).

To access new-for-old replacement insurance, you need:

• To accurately declare values and ages to calculate the replacement value.
• To regularly update the policy.
• To retain documentation (receipts and purchase dates).

Consequences for the insured party

The difference between the two different policies carries significant financial implications.

If the actual value applies

• Cost gap. The payout will not be enough to buy a new, like-for-like asset. You will need to contribute the difference between the depreciated value and the cost to replace the new item.
• Loss of purchasing power. With items that are several years old, the actual value may be barely 30-40% of the replacement cost, requiring you to make an additional contribution or make do with lower-quality alternatives.
• Limited options. You will only be able to purchase a similar second-hand item, a lower-quality new product or make a significant additional contribution.
• Impact on quality of life. In many incidents of loss or damage, applying the actual value may result in a significant deterioration in your quality of life.

For example, if there is a fire, an actual value family could receive €15,000 for the movable assets when the cost to replace them with new items would be €40,000, requiring them to seek additional financing.

If new-for-old replacement applies

• Full replacement. You receive compensation that allows you to purchase a new, like-for-like item without needing to pay out of pocket.
• Real financial protection. The insurance fulfils its essential function by returning you to where you were before your loss of assets.
• Peace of mind. You know that any item covered by the policy will be replaced in full.
• Technology upgrade. New items often incorporate technological improvements and increased efficiency.
• Maintained quality of life. Particularly important where the loss or damage is complete.

A family with a home insurance policy that includes new-for-old replacement value would receive the €40,000 needed to replace their moveable assets in full.