Replacement cost value
Replacement cost value is an insurance basis that pays what it costs to repair or replace damaged property today, with materials of like kind and quality, and without deducting for age or wear.
It is the coverage that actually puts a house back.
Against actual cash value#
The alternative basis, actual cash value, subtracts depreciation.
The difference is not academic. A roof with fifteen years of a twenty-five year life used up is paid at a small fraction of what a new roof costs under actual cash value. Under replacement cost the insurer pays for the new roof.
On a total loss, the gap between the two bases can be most of the value of the building.
The recoverable depreciation mechanism#
This is the part that catches people mid-claim, and it is standard practice rather than an insurer being difficult.
Most replacement cost policies pay in two stages. First the actual cash value — the depreciated amount — is released. Then, once the repair is genuinely completed and documented, the recoverable depreciation is paid.
Which means the policyholder must fund the gap, at least temporarily, to complete work they are being reimbursed for. An owner without access to that interim money can find themselves unable to trigger the second payment at all.
There is also usually a deadline for completing the work and claiming the balance. Miss it and the recoverable depreciation is forfeited.
Not market value#
Replacement cost is what it costs to rebuild the structure. It has nothing to do with what the house would sell for.
Land carries value and does not burn down. In expensive locations, market value sits far above rebuilding cost. In areas where construction costs are high and sale prices are low — which describes a great deal of greater Minnesota — rebuilding costs exceed market value, sometimes substantially.
An owner insuring to the purchase price in that situation is badly underinsured against a total loss.
Extended and guaranteed replacement cost#
Two endorsements worth knowing about.
Extended replacement cost pays a stated percentage above the dwelling limit — often twenty or twenty-five percent — as a buffer against construction cost inflation and against the demand surges that follow regional disasters.
Guaranteed replacement cost pays what it costs, without a cap. It is less widely offered than it once was.
Construction costs have moved considerably in recent years. A dwelling limit set at purchase and never revisited is very often no longer sufficient, and a buffer endorsement is one of the cheaper ways to close that gap.