What principle does replacement cost valuation support?

The principle that replacement cost valuation supports is centered on the idea that policyholders must replace insured items before full reparations can be made. Replacement cost valuation refers to the calculation of what it would cost to replace an item with a new one of similar kind and quality, without deducting for depreciation. This method underscores the importance of having adequate coverage to replace damaged or lost items, thereby providing the policyholder with the ability to restore their property to its previous state without financial loss due to depreciation.

When replacement cost coverage is in effect, it allows policyholders to receive a claim payment that reflects the current cost of purchasing a new item, which is crucial for full reparations. This means that in the event of a loss, a policyholder is not limited to the cash value of the damaged item, but rather has the ability to replace it completely, thus supporting the notion that replacement should occur first to restore the insured's property effectively.