Understanding Replacement Cost

What is replacement cost?
The term replacement cost refers to the cost of reconstructing the unique features of your dwelling in today's marketplace using materials and design of similar quality.

How is your replacement cost calculated?
Replacement cost valuation is developed by using renowned national independent sources (i.e.: Marshall & Swift/Boeckh [MSB], e2Value, MSB’s RCT, RCT HV, BVS) for building data. In addition to the cost of materials, your valuation includes fees to employ an architect and a local contractor. Your valuation is also affected by factors such as your dwelling's accessibility, age, scale and architectural complexity. It does not include the value of land, any detached structures or the cost to remove debris after a loss.

Why not insure my dwelling for its market value?
The market value of your dwelling is influenced by non-construction factors such as land, landscaping, detached structures and your community. The amount of insurance you purchase should reflect the cost necessary to completely rebuild your dwelling as it exists today - not the price someone else is willing to pay to acquire it.

Is that the same as a real estate appraisal?
No, it is a completely different type of appraisal. For example, a typical real estate appraisal generated as part of a loan application process is not appropriate for insurance purposes. The “cost approach” section of a market value appraisal is based on a “new construction” rather than a “reconstruction” basis. While not appropriate for insurance, the “cost approach” is what you’ll commonly get from a real estate appraiser if you simply ask for the “replacement cost;” it’s what they’re most familiar with, and they don’t need to spend money on an additional software packages to do the job. If you see the term “replacement cost new,” or “RCN,” it’s not the right kind of estimate. When ordering an appraisal, you probably need to take the extra step to tell the appraiser: “This is for insurance purposes; an estimate based on replacement cost new will not be acceptable.” If the appraiser seems baffled by such a request, you need to find a different appraiser.

What should I be wary of?
Be wary of any appraisal firm that promotes its services on the basis that they can generate a lower estimate than the insurance company. Likewise, be wary of any agent/broker that has a “friendly” appraiser who is willing to provide a favorable estimate. Any estimating software can be manipulated to generate an artificially low number. It is important for the insured to carefully review the detailed report to make sure the entries are valid. Neither the “friendly” appraiser nor the agent/broker will likely suffer any consequences of under-reporting the exposure values.

For more information or to schedule an a Replacement Cost Valuation, please call 609--884-9185 or Contact us by email.