Personal Insurance Blog

The term replacement cost or replacement value refers to the amount that an entity would have to pay to replace an asset at the present time according to its current worth. There are calculators from insurance carriers and estimator tools like MSB (Marshall & Swift/Boeckh) that will estimate what it will cost to rebuild your home, not what you can sell it for.

This is the example I use when explaining this to my customers:

The building materials and labor used to rebuild a home come from the Big Box stores, like Home Depot or Lowes, and the carpenters, plumbers and electricians that are in the same basic zip code as the home. Therefore, the cost of the materials and labor are specific to the area in which the home is built.  If you live in an area that has easy access to one of these Big Box stores and has plenty of workers to rebuild the home, the replacement and selling prices are going to be pretty equal. If you live on an island and all the materials and labor have to take a boat to get to your property, then the replacement cost is going to increase. Therefore, it sometimes costs more than the selling value to rebuild a home. 

Some customers also ask about why the value is different than the cost. I usually explain this example to them: 

One home may be on the top of a hill with a scenic view while the exact same home is at the end of that street with a view of a parking lot or commercial property. The materials and labor are the same to build, but one has a better value because of the view. This may also come into play in certain towns that have better schools or amenities.