Market Value or Replacement Cost?

“The value of my building is going down, but the limit on my insurance policy has increased!  How is that possible?”

The short answer is simple.  If you have a fire, your insurance company is not going to buy your building; they are going to repair or replace it.  That is something entirely different.

·         Market Value

There are many ways of valuing property.  Market Value is the amount your property would bring if you sold it today.  It is heavily influenced by such factors as location, condition, the state of the economy, and supply and demand in your area.  Market Value is used by the real estate broker and the banker; you may use Market Value in casual conversation or when figuring your net worth

·         Replacement Cost

Insurance policies are usually written on a Replacement Cost basis with “like kind and quality” materials and new for old.  If your building is totally destroyed by a covered cause of loss, the company will pay what it would cost to replace that building with new construction of similar size and quality.  If your building is damaged, the carrier will repair it using new materials of similar quality.  Although your shingled roof was ten years old the day the wind carried it away, the company will replace it with a new shingled roof.

Replacement cost coverage is the best option for most property owners.  The alternative is to insure on an Actual Cash Value basis; in that case, the insurance company takes a deduction for depreciation on every claim.  If the average life expectancy of your roof is 20 years and your current roof is 10 years old at the time of loss, the insurance company will pay for half of the cost of a new roof and you will pay the balance

·         Qualifying for Coverage

To qualify for Replacement Cost coverage, a property owner must insure for the Replacement Cost of the building.  The insurance industry uses a rough estimating system to determine approximately what it would cost to rebuild a structure similar to yours.  With a Homeowners policy, the underwriter will usually not insure your building on a Replacement Cost basis if you insist on insuring for less.  Under a commercial policy, underinsurance can lead to a coinsurance penalty on a partial loss or running out of limits on a total loss.

Your agent can usually show you the rough estimating system used by the insurance company to develop the approximate insurance limit.  However, you should remember that there is no guarantee that the limit will be enough to rebuild your property.  Review the limit your agent gives you very carefully; if you do not think it is enough, ask if it can be increased so that you would be able to rebuild what you have at the time of disaster.