Pursuant to the 1998, Austin Court of Appeals opinion styled, Great Texas County Mutual Insurance Co. v. Lewis, “replacement cost” is when the insurer pays the insured the “amount necessary to repair or replace” the damaged property with another “of like kind and quality.” The insurer is agreeing to restore the property to a condition substantially the same as that existing before the damage was sustained.
In Great Texas, the court said that replacement cost is a measure of loss that does not allow for depreciation. As an example, the Great Texas case involved damage to a car engine. The insurer calculated the cost of repair to be $3,608.27. From this amount the insurer subtracted a deductible of $527.00 and $2,031.72 for betterment or depreciation, leaving $1,049.55, which the insurer offered the insured to discharge its obligation under the property damage section of the policy. The court stated that, because the car was a functioning or operating automobile before the damage, the insurer was required to pay an amount necessary for the repair or replacement of an automobile of that character. If the insurer were allowed to to discharge its obligation by paying the insured $1,049.55, the insured would not have a sum sufficient to restore his engine and automobile to a functioning or operating state. Therefore, the insurer was required to pay the cost of a remanufactured engine without deducting for betterment or depreciation.