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What is Replacement Cost Valuation?

Many people believe replacement cost in an insurance policy is:

  1. What they paid for it
  2. What they think it’s worth or
  3. The market value

However, none of the above are considered when referring to the replacement cost of a building or structure.

Replacement cost covers the cost of repairing or rebuilding the structure with materials of the same or comparable quality.   

Market value refers to the estimated amount that a property would sell for on a specific date.  Land, the real estate market and many more factors are considered in the property’s market value.

Unlike market value, replacement cost does not include the value of any land and is determined based on the amount needed to hire contractors and purchase materials to repair a building or construct a replacement.

Another important factor about the replacement cost of a building is that it does not take depreciation into account at the time of loss. 

Calculating a property’s replacement cost is difficult, and can be easy to insure for the wrong amount.

A few factors that effect changes in rebuilding costs are:

  • Newly redesigned kitchens
  • Unique structural designs
  • Types of building materials
  • Media rooms
  • Completing unfinished areas
  • Changes in economic conditions
  • Building codes and construction cost
  • Architectural and contractor fees

Having an in-depth conversation with your insurance broker about a particular property will help you determine your specific insurance needs and obtain a policy that meets those needs.




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