Replacement Cost Value versus Market Value

One of the most common misconceptions we see are that insureds base the amount they would like to insure their property for, on the assessment, or market value of the property, and not the replacement cost value to which most insurance coverage is based upon.  It is immensely important to have an understanding of this, so to avoid any coverage inadequacy at the time of a loss.  A few things to consider…
  • Market value or Appraised Value…is how much a piece of property is worth to another buyer

*The problem with using this figure as a basis to establish your coverage limits is that the market value is constantly changing based on the fluctuations in the real estate marketplace.  And the real estate climate has nothing to do with the determination of how much your property would cost to replace today.  Also, the cost of construction is not taken into consideration here (except in new construction).

  • Assessment Value…is the property value established for tax purposes

* The issue with using this figure to establish your coverage limit is that this figure is largely influenced by politics and the economy in the surrounding area, as it is the value determined ultimately by the municipality.  Assesment value is highly determined by the local comparables/similar properties nearby, and what they have sold for. That being said, there is little consideration for property-specific enhancements.

  • Replacement Cost Value…the value established for s a given property for the purpose of insurance coverage, with the objective of reimbursing for the total cost to rebuild in entirety, should a total loss occur.  This is the most optimal coverage option, as it takes into consideration a handful of factors.

Replacement cost is driven by the cost of labor and building materials in that particular demographic area.  It takes into consideration all ‘bells and whistles’/enhancements and upgrades, and also includes the cost of any law ordinance requirements that would require a property add additional features in order to comply with today’s building codes.  Also, once a loss has occurred on a property, there is always some sort of damage – whether it be fire, windstorm etc., and a RC/Replacement Cost figure will take into consideration the cost of the cleanup and/or debris removal prior to the rebuilding or repair.