Replacement Costs and Understanding the Value of a Building for Insurance Purposes

Replacement, reproduction and reconstruction costs… oh my!

There are many different approaches to establishing the value of a building or structure. Selecting the best option for you will not only depend on your ultimate goal but also the manner in which the value is determined.

Let’s take a look at the six different types of building values and discuss how best to calculate appropriate insurable values for the buildings and structures on your property schedule:

Replacement Cost New:  The amount required to reproduce the entire property in like utility and function. It is based on current market prices for materials, labor, equipment, contractor’s overhead, profit and fees. It does not include provisions for overtime, bonuses, or premiums on materials.

Reproduction Cost:  The amount required to reproduce a duplicate of the entire property. This is very similar to replacement cost. However, where replacement cost considers like utility and function, reproduction cost considers like kind and materials. The goal would be to replace the structure as an exact replica of the original. (To learn more about how this is done for historic structures, click here.)

Reconstruction Cost:  The amount required to replicate a building of like kind and materials with the added costs associated with reconstruction as opposed to new construction. Factors such as time urgency, debris removal, and hazardous material and mold concerns are all used to formulate reconstruction costs. As many buildings may not have these concerns, reconstruction cost can produce an inflated value and lead to over payment on premiums.

Actual Cash Value (ACV):  Replacement cost new less depreciation over time. ACV takes into account a decrease in value due to wear and tear and may not cover the cost of rebuilding after a considerable loss.

Total Insurable Value (TIV):  The aggregate of all property values ranging from structure to contents (personal property), land improvements, and infrastructure.

Exclusions:  A provision in an insurance policy describing what is not covered by the policy, the non-insurable aspects of construction. This may include subterranean piping, foundations, or utility lines. It’s important to review policy coverages and define the exclusions before making your valuation analysis. Typically, exclusions fall in the 4-6% range of the total building value.

Generally, an appropriate insurable value can be calculated by subtracting any exclusions from the replacement cost new.

But… an extra word of advice!

Now that you have your arms around the different costs and types of values, you can dive right in to assigning value them to your property, right? Ah, it might not be quite so easy! Before making an assumption on which costs are most appropriate to factor into your insurable value calculations, we at Centurisk advise you to review your coverage policy and consult your appraisal partner to learn more about the processes used to arrive at these numbers.

While some appraisal firms include costs associated with code compliance, site accessibility, labor, and materials in their calculation for replacement cost new, others — including some online valuation programs — do not. With that said, when it comes to protecting your property in the event of a loss, there really is no substitute for a true partnership with an appraisal firm and an onsite physical inspection.

For further education on this topic…

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