Distinguished Programs specializes in providing insurance for City Homes and New York Brick & Brownstone properties. Often questions arise from property owners on how to best determine the amount of coverage they need to purchase under their Commercial Property policy – whether this should be based on the building’s market value or replacement cost value. We put together an info sheet, “Understanding the Difference: Market Value vs. Replacement Cost,” to help agents and brokers explain how each property valuation methodology works and the benefits of insuring a property with Replacement Cost coverage.
Replacement Cost vs Market Value
In a nutshell, insuring a multi-family home’s property based on market value represents the amount someone will pay for the property, and takes into consideration several factors including comparable sales in the neighborhood; the size and condition of the building; how close the property is to the city; employment opportunities; and popularity and the demand of the market type; among others.
Replacement Cost coverage, on the other hand, will pay for the cost to rebuild the property as it was before – of “equal quality and utility” – if it’s destroyed. Replacement costs take into consideration the current cost of materials and labor to rebuild the property in the event of loss. These costs most likely have increased since the structure was first built and were far less expensive than they are today because of inflation.
The market value of a property can easily change, particularly in a down economic market where sales prices are negatively impacted. The surrounding area can also have an effect on the market value, causing the property value to dip lower than the replacement cost valuation. A property owner could end up being underinsured if the property uses the market value rather than the replacement cost value for insurance purposes.
Using replacement cost as the building limit in property insurance for multi-family buildings is critical for both insurance companies and insureds to ensure sufficient coverage.
Market value represents the estimated price at which the property would be sold on the open market – it’s the price that was paid for the home. Replacement cost is the estimated cost it will take to rebuild the property in the same spot, same size and same quality of construction, at today’s costs, in the event of a loss. Insurance companies use replacement cost valuation when determining how much coverage an insured should carry. That’s because, if a home is insured for its market value, the owner is at risk of having insufficient coverage or being over insured.
Distinguished’s City Homes Program, designed for small urban, older multi-family buildings, provides replacement cost valuation as part of its property package. You’ll find a white paper, “Understanding the Difference: Market Value vs. Replacement Cost,” that you can share with your insureds so they can truly see the benefits of insuring their property based on its replacement cost value.