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Replacement Cost Value for Home Insurance

By October 17, 2019 Personal Insurance

A question we are often asked relates to the Replacement Cost of their homes. “Why is the replacement cost so high when I just paid $XXX,XXX for my house?”

Where we get the numbers

The simple answer is that those figures have very little to do with one another. For insurance purposes, when we calculate the Replacement Cost of your home, we are using a calculator contracted by the insurance company and provided by a third party company: Marshall & Swift/Boeckh (MSB). The MSB values are calculated from statistical data that estimates the cost, based on labor & materials costs in your area, would be to haul away the debris and rebuild your house from the ground up. These figures assume the home will be rebuilt in like kind and quality to your current house. We also enter details that impact the replacement cost of your home, such as custom cabinetry, detailed moldings, and higher quality materials used in the construction.

If your home was in someplace like California or New England, you’d find that the replacement value is much less than the market value of your home. Here in the mid-west, you see the opposite in most cases. The value of the land itself is not factored into this calculation, because the land remains even if the house is destroyed.

How we use the numbers

We usually write policies for Replacement Cost, Replacement Cost Plus (this adds a 25-50% buffer to cover unexpected costs). Some of our companies offer Guaranteed Replacement Cost (which says it will rebuild your home with like kind and quality no matter the price). There are some cases when we consider an Actual Cost Value (ACV) replacement, but they are rare, as you get a lower settlement for partial losses.

We offer “Functional Replacement Cost” for older homes. If there is a loss, the homeowner may choose to have the walls rebuilt with drywall and poplar moldings instead of the original lath and plaster with oak trim. The house *functions* the same, but is rebuilt with modern and less expensive or labor-intensive materials.

In any case, at Agency Associates, we ensure that the limits on your insurance are adequate to protect your assets.

Call us today for a no-obligation policy review and quote. The worst that can happen is we’ll tell you that you’ve already got the best value out there. Who knows? We might be able to save you some money while improving your coverage.