Three dining room were stolen from my house. My insurance will pay to replace them. However, I don't really need three chairs, so I thought I would replace them with two chairs of a better quality for the same amount of money. However, my insurer says I must replace all three. Can't I decide how to spend the insurance money I receive? -- Standing Pat

Dear Pat:

So you and your insurer have reached a stand-off! However, the reason your request doesn't sit well with your insurer is that your policy, like most homeowners policies sold today, pays replacement cost on lost or damaged property. That means you must use the insurance money to replace the stolen chairs with new chairs that are as similar as possible in make and quality to those you lost. Your insurer will probably request a sales receipt as proof that you have done so.

While that may not suit your needs, replacement value insurance actually works to the policyholder's advantage, because it doesn't take depreciation into account when paying a claim. In other words, you can spend whatever it costs to replace your chairs today, without losing any money for their age and condition at the time they were stolen. So if your chairs were several years old, your insurance pays for you to replace them with brand new chairs of similar quality.

But understandably, the insurer will pay out that kind of money only if you're going to use it to replace the stolen items. Otherwise, you would be profiting from your insurance claim, and that would end up costing all of us more in the long run.

There is, however, another option if you still prefer not to replace the chairs, or if you want to replace them with something different. You could be paid "actual cash value" instead of replacement value for your claim. But if you choose actual cash value, the insurer will have to allow for depreciation in calculating your insurance payment, and you would not be able to take advantage of the replacement cost option. To put it another way, the insurer would calculate the amount of your payment by considering "What is that item worth today?" instead of "What would it cost to replace that item today?" The difference could be significant.

Remember, insurance is intended to put things back the way they were before, not to make them better than they were. The choice is yours -- replacement value or actual cash value -- but you still can't have two chairs for the replacement cost of three!

Note: Remember, policies vary, so when in doubt, consult your insurance representative.