Replacement Cost. What it is and what you need to know.
It’s easy to think, “I know what my building is worth, so that’s the coverage I need.” Unfortunately, that is incorrect! While you may know the market valuation of your property, you may not know what it would take to rebuild. These costs aren’t tied to your building’s market value, so as supplies and labor become more expensive, it’s important to revisit your coverage to make sure you aren’t under-insured.
1. What is a replacement cost?
Replacement cost is the cost to replace damaged property without depreciation. This includes materials, labor, permits, and any other expenses paid to replace the property. This is not tied to what your property’s market value.
2. Replacement cost can inflate faster than property value.
Due to inflation, supply chain shortages, a pandemic, and a war, replacement costs are consistently higher than they were even a few years ago. Currently, I recommend having about $450–$550 of coverage per square foot of your property. To check how you size up, find your “building replacement cost limit” in your policy and divide it by your square footage. Many of the new clients I’m seeing have this number at around $150–$250 per square foot, which could leave them insufficiently covered in the event of damage.
According to Scott Horsley at NPR, lumber shortages during the COVID-19 pandemic caused prices to surge by over 300%. Even now, lumber still costs about 80% more than it did before the pandemic. This increase in the price of lumber means that it costs more to fix damage now than it did before the pandemic — meaning your old coverage might not cut it.
3. A pitfall related to replacement cost is the coinsurance clause.
Policies generally have a clause so if you don’t have enough coverage for your property, you won’t get what you bargained for when filing a claim. In most cases, companies follow this equation to see how much you’ll receive:
(what you bought / what you needed) x the loss you’re filing = what you’re getting
An example with insufficient replacement cost:
Let’s say you have a building worth 2 million dollars and you only have 1 million dollars of coverage. You have damage for 100,000 and you ask your insurance to foot the bill. Unfortunately, because of the coinsurance clause, you’re probably going to receive 50,000, but with a 10,000 deductible, you may only receive 40,000.
In this scenario, you may have been expecting 90,000, so to end up with only 40,000 is a punch to the gut — and your bank account.
An example with sufficient replacement cost:
Let’s say you have a building worth 2 million dollars and you have 2 million dollars of coverage. You have damage for 100,000 and you ask your insurance to foot the bill. Because you have enough coverage, your insurance covers your damages after your deductible.
Make sure you have SUFFICIENT coverage.
With price increases for replacement cost and fine print within policies, it’s easy to find yourself in pitfalls for property insurance. With almost two decades of NYC property insurance experience, I’m ready to sit down and help you patch the holes in your coverage—whether you’re a business or a homeowner.
Reach out to me at nscopelliti@honigconte.com to get an insurance advocate on your team.