Not a day that goes by in the insurance industry that an insured does not question why the Replacement Cost of their property is so high. They then proceed to try and convince their insurance agent that they could not possible sell their property for the high value of the replacement cost. This leads them to proclaim that the insurance company needs to lower the replacement cost on their insurance policy because they feel that they are getting ripped off. Sometimes Replacement Value can easily be confused by homeowners with other“ values” when referring to a property. You should know the difference between these three values in particular: Market Value, Assessed Value and Replacement Cost of a property. Here is the difference between them which will clarify why one is so much higher than the other two.
This is the value of a property on the open market. This is the value that you could buy or sell a property for. This fluctuates with supply and demand and has no bearing on rebuilding a damaged structure.
This is the value that your municipality puts on your property. It is one of the components that make up the formula that is used to generate your tax liability for your property. This value is generated by compiling data from the previous year’s sales within in the municipality and then applying it to the current tax year.
This value is generally the highest of all three values. As a property owner this is the most that your insurance carrier will pay to rebuild your structure. There are many reasons why this value is higher than the other two. Replacement cost encapsulates a number of variables that included but are not limited to, debris removal of the original structure, cost of materials, labor costs to rebuild the structure, local permitting fees, architectural drawings and blueprint fees, etc. All of these expenses are not contained in the Market Value nor the Assessed Value because there was no need to include them since the structure is intact.
It is important to remember that the only time Replacement Cost becomes a factor is when you have had a loss to your structure. You do not want to find yourself short on coverage and not be able to rebuild your structure to the specifications that you previously had. If you are unsure what limits you have on your home, call your insurance agent or stop by any FBinsure location for a free assessment of your existing Homeowners policy.