Broker Check

Home Owners Insurance: Replacement Cost

June 02, 2020

Your property may be the biggest purchase you make, so naturally you're serious about protecting that investment.

Make sure your structure is insured for at least 100% of its estimated replacement cost. Determining your structure's estimated replacement cost is important because this will ultimately determine which policy options are available to you. Since it is impossible to predict today what the exact cost will be to replace your structure in the future, it's important to have enough insurance to cover losses caused by:

  • Weather. Storms, fire, wind, hail, lightning, freezing of a plumbing system, weight of ice, snow or sleet.
  • Non-weather.  Theft, vandalism, riots. aircraft and vehicles.
  • Accidental direct physical loss. Water from plumbing, tearing/bulging of heating or cooling systems, artificially generated electrical current.

Market value vs. replacement cost

Market value and replacement cost are two separate amounts, and its important to understand the difference.

  • Market value is the amount a buyer would pay for a structure, including the land.
  • Replacement cost is the rebuilding cost necessary to repair or replace the entire structure, based on the size and characteristics. 
  • Replacement cost does NOT include the outstanding amount of any mortgage loan.

When buying a new property, be sure to obtain a replacement cost estimate.

Ask if a replacement cost estimate is available when you have the structure appraised. Or consult with your local builders association or ask a reputable builder for an estimate. A contractor's estimate or professional replacement cost appraisal may be desired if your structure has a truly unique design or unusual features.

Estimates should reflect your structure's features.

This includes architectural details or unique building materials that may affect your estimated replacement cost, such as:

  • Upgraded bathrooms or kitchens ( including cabinets).
  • Finished or partially finished basement.
  • Additional rooms or living space.
  • Custom molding or arched windows.
  • Other unique features.

It is also important to consider estimating the replacement cost of detached structures, such as:

  • In ground pools.
  • Retaining walls.
  • Additional dwellings with finished living space.

If you are unable to obtain a detailed estimate from these sources your Insurance agent can usually discuss other options for estimating the replacement cost of your structure.

Review your Insurance coverage Annually.

Have you recently  remodeled or made improvements? When you upgrade or improve your property, you may increase your structure's estimated replacement cost. you should review your policy to see if any increase in value due to remodeling or additions to your structure impact your coverage amount. Your insurance agent will then help you adjust your policy to meet your insurance coverage needs.

Has the rate of inflation risen since your last appraisal?

Insurance providers can offer coverage that automatically adjusts each year in an effort to compensate for increases in construction costs in your area. However, certain conditions, such as sever weather, can increase the demand for labor and materials, and raise costs beyond normal inflation, It is important to update your coverage amount each year to keep up with the changing economy.

What influences the building costs in your area?

Market conditions in your area may have an impact on the cost of rebuilding your structure after a loss. Replacement cost is influence by:

  • Supply of labor
  • Demand for labor
  • The cost of construction materials

Keeping up with the current market conditions in your area-and changing your insurance coverage accordingly - will help you maintain coverage at least equal to 100 percent of the estimated replacement cost coverage for you structure.

If you have any questions, ask your Insurance Agent.

You want to safeguard your property - and a current estimate of your structure's estimated replacement cost is key to making an informed decision about your insurance.