by Gary Tate, Property Appraisal Quality Manager
When you’re insuring a historic property, you’re likely to face questions you wouldn’t encounter with more modern buildings. One of the biggest of these is whether you insure the building for replacement costs or reproduction costs. But before we dive into that, first let’s talk about what constitutes a historic property.
What is a Historic Property?
The National Register of Historic Places is the official list of the Nation’s history-rich locations that have been deemed worthy of preservation, and it was first authorized by the National Historic Preservation Act of 1966. Their goal is to coordinate and support public and private efforts to identify, evaluate and protect America’s historic and archeological resources.
There are certain processes and requirements that determine whether or not a building or area can be deemed historic. Generally, historical buildings must be at least 50 years old and are associated with events that have made a significant contribution to history or are associated with the lives of significant people from our past.
Historic Property Insurance Coverage
It’s important to understand the different risks associated with historic properties. Unless certain entities have had a proper insurance appraisal completed on their historic property, they’re more than likely underinsuring it, which puts them in an unfortunate spot in the case of a risk event. There are many hidden costs of historic reconstruction that need to be considered, because instead of replacing certain items, they will have to be reproduced. As a result, it’s important to use a reproduction cost rather than a replacement value when valuing these properties and their unique features for insurance purposes.
The Difference Between Replacement Costs and Reproduction Costs
So, what is the difference between replacement costs versus reproduction costs?
- A replacement cost is the estimated cost to construct, at current prices as of the effective appraisal date, a substitute for the building being appraised, using modern materials and current standards, design, and layout.1
- A reproduction cost is the estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicate or replica of the building being appraised, using the same materials, construction standards, design, layout, and quality of workmanship and embodying all the deficiencies, super adequacies, and obsolescence of the subject building.1
The key difference is the type of improvement being considered. Are we looking at a new building with modern materials, or an exact replica of the original historic structure?
For example, let’s say we’re appraising a house with plaster walls. A reproduction cost estimate requires estimating the cost to construct plaster walls. A replacement cost estimate, however, estimates the cost to put up sheet rock walls according to the current standard.
That’s why it’s so important to consider the different risks associated with historic structures. A wise underwriter should examine the following issues when valuing and insuring a historic property…
Replacement Cost: The estimated cost to construct, at current prices as of the effective appraisal date, a substitute for the building being appraised, using modern materials and current standards, design, and layout.1
Reproduction Cost: The estimated cost to construct, at current prices as of the effective date of the appraisal, an exact duplicate or replica of the building being appraised, using the same materials, construction standards, design, layout, and quality of workmanship and embodying all the deficiencies, super adequacies, and obsolescence of the subject building.1
How Codes and Regulations Impact Reproduction Costs
In some cases, complying with updated building codes could interfere with the integrity of an original structure, which could reduce the historic value of the property. In this case, the building would generally get a pass on code compliance because of this. On the other hand, if the building has limited historic significance, it must comply with the updated codes and regulations.
Examples of codes that could impact the cost of construction include:
- Adding sprinkler systems for fire safety compliance
- Making sure that the structure is compliant with the Americans with Disabilities Act standards for accessible design (elevators, ramps, etc.)
- Seismic/windstorm code upgrades
When valuing a property, underwriters will want to weigh both the historic nature of the building and the potential for code compliance to detract from the structure’s historic value
How Does Rebuilding as “Like Kind and Quality” Affect the Value?
Construction in historic buildings tends to be more costly because their repairs are typically designed to be of “like kind and quality.”
This language is included in most standard insurance policies, and it obligates the insurer to replace, repair, or rebuild the property with the same materials and level of craftsmanship that had been there originally. This can be extremely difficult, however, because the materials that were used 50+ years ago can sometimes be hard to find and are often far more costly than the standard construction materials that are used today. The more ornate the structure, the more costly it is to repair or replace. So, it is important to weigh the feasibility of reproduction in your valuations and expect additional costs associated with any “like kind and quality” insurance appraisal.
Other Factors to Help Determine the Value of a Historic Building
The most common way to determine a building’s valuation is based on its occupancy and square footage, using either today’s cost for similar materials or using the market value/purchase price.
Unfortunately, neither of these methods work in determining the value of a historic structure. Instead, there are several factors that need to be considered:
- You may need highly skilled craftsmen, decorative artists, muralists, and stonemasons to reproduce features of the historical building
- There may be some hard-to-match materials within the building— particularly timber, masonry, and stone.
- There will be extra time involved to rebuild and reproduce.
All of these elements factor into reproduction costs and increase the value over simple replacement.
An interesting example of this was years ago when I appraised a historic courthouse that was built in the early 1900s. Prior to my visit, it had undergone a complete renovation. During the planning stages for this renovation, laser scans were done to obtain accurate field measurements of existing conditions. A team met with the lead architect, structural engineer, and the preservation architect on a weekly basis for nearly eight months to coordinate all of the details involved with installing new mechanical, electrical, plumbing, and fire sprinkler systems into a building that was not originally constructed to receive these systems. Much of the marble on the walls and floors was damaged and was replaced from the same quarry where the original marble was quarried over 100 years ago. The quarry was able to produce an exact match to the original marble, 100 years later. I found it fascinating that the grand rotunda featured 100-year-old marble adjacent to the new marble — visible proof that an absolute match was achieved. Replicas of the original light fixtures were made, wall murals re-created, and every aspect of the original 1910 construction had been recreated to the greatest extent possible, costing over $65 million dollars.
Had this building been appraised at replacement cost, the insured value would have been less than half of what it cost to reproduce the building. Meaning, in the unfortunate event of a loss, the money received for the claim would not have been nearly enough to cover the cost to repair or replace. That could have been one tragic mistake.
When It Comes to Historic Valuations, Expertise Matters
If you don’t have the knowledge to know what to look for, a historical property valuation can be difficult to perform accurately. Fortunately, you are not alone; there are valuation experts available that specialize in these areas. At Centurisk, we have valuation professionals with extensive experience in valuing historic structures for insurance purposes. If you are in need of a historical valuation, contact us and we’ll be more than happy to discuss your property.
- Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010)
About the Author
Gary Tate resides in Beaver, PA with his two daughters, Allison, 17 and Esa, 15. When he is not acting as Quality Control Manager for the Risk Management division of Centurisk, he spends most of his time with his girlfriend Shannon, his kids, and their dog, enjoys going on a daily run, loves to cook, and is a collector of fine red wines.