Replacement Cost Value for Home 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?” No, the insurance companies aren’t out to get you.

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 determines what 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 that the home will be rebuilt in like kind and quality to your current abode. We enter additional features that would change the replacement cost of your home, such as custom built in cabinetry, detailed moldings, and higher quality materials used in the construction.

If your home were in someplace like California or New England, you might find that the replacement value is much less than the market value of your home. Here in the midwest, you see the opposite in most cases. The value of the land itself is not factored into this valuation, as the land would exist in that location regardless of the condition of the home.

Our policies are usually written for Replacement Cost or Replacement Cost Plus (which covers other factors that might increase the cost to rebuild your home, such as widespread damage that causes scarcity of available labor and materials). There are some circumstances in which we would consider an Actual Cost Value (ACV) replacement value for your house, but they are rare, as you get a depreciated settlement for damages. There is another type of valuation called “Functional Replacement Cost”. This is generally used for older homes. Maybe they currently have lath and horsehair plaster walls. Should something happen to the house, assuming there are no historical restoration obligations, the homeowner may choose to have the walls resurfaced with standard drywall and moldings rebuilt with poplar instead of the original oak. The house still *functions* the same, but was rebuilt with more modern and inexpensive materials.

In any case, at CA, we will use the information we collect to ensure that the limits on your insurance are adequate to protect your assets.

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