Understanding Replacement Cost Estimates
What is a Replacement Cost Estimate?
A Replacement Cost Estimate (RCE) is an estimate of what it would cost today to rebuild or replace your insured home or buildings with materials of like kind and quality after a loss.
An important distinction is that a RCE is not the market value of your property, what you originally paid to build the structure, or your tax assessment value. Instead, it estimates the current cost to reconstruct the building, taking today’s labor and material costs into account.
How is a Replacement Cost Estimate Calculated?
Insurance companies use specialized replacement cost software that incorporates current construction pricing and considers details about each building, including building size, square footage, perimeter, foundation type, number of stories, construction type, roofing material, interior features, HVAC, electrical, and plumbing (among others).
While these programs may not be 100% accurate it has been documented that they are on average within 2.5% of 100% accuracy. These are the same systems that Claim Adjusters use when calculating replacement cost on property claims.
Everything that is attached to or built into a building becomes part of that building and is taken into consideration when determining its Replacement Cost.
Why Does the Estimate Change from Year to Year?
Construction costs change every year. Factors such as inflation, lumber prices, steel costs, labor rates, and updated building codes can all significantly affect the cost of rebuilding, even if nothing has changed about your building. That’s why as part of our annual review of your policy, we update our RCEs for your buildings to help make sure you are adequately insured.
We use these to help assist you in determining what limits you wish to insure your buildings for. It is highly recommended to insure to 100% Replacement Cost coverage. However, final say lies with you, and we need to make you aware of all that plays a role in your decision.
Why is an Accurate Replacement Cost Important?
If your building is insured for less than it would cost to rebuild, you may have to pay a significant portion of the rebuilding costs yourself after a loss. All policies contain a Coinsurance Clause, which states that a building must be insured for at least 80% of its Replacement Cost, or the insured is subject to a Coinsurance Penalty in the event of a loss. Having an accurate Replacement Cost Estimate is important to make sure that your buildings are adequately insured and can be rebuilt without unexpected out-of-pocket expenses.