Replacement Cost is the cost necessary to repair or replace your entire home. When you insure your home for its replacement value, your insurer will reimburse you for the cost of rebuilding or repairing your home.
The best way to determine the replacement cost of your home is to hire a building surveyor to produce a detailed estimate. Only the cost of the property’s structure and its associated systems, fixtures, and finishes will be included in the estimate; land value is not to be included.
In the event of a loss, replacement cost coverage will help return you to your home and usual quality of life with minimal financial interruption. It is recommended, that an insurance policy covers 100 percent of a buildings replacement cost.
Replacement Cost will change over time and therefore it is important to have the cost of replacement reviewed at least every 3 years. Insurers should be made aware of any improvements to the property as this can also increase the replacement cost figure.
Example: Three bedroom detached single storey residence concrete block built with seamed metal roof situated -Georgetown, Cayman Islands
Land: 0.25 Acre ( or 10,890 sq. ft) @ $10 sq ft $(108,900)
Residence: 2500 sq. ft. @150sq. ft. $375,000
Site Works, Generator, Swimming Pool,
Propane Tank, Deck Driveway Etc. $50,000
Add-Professional Fees, Debris Removal- 10% $ 42,500
Replacement Cost EXCLUDING Land $467,500
What Is Market Value?
Market Value is the amount that a buyer would pay to purchase a home and its land in its current condition. Unlike the Replacement Value, the Market Value is influenced by factors beyond the material and labor costs of repairs or reconstruction, such as proximity to good schools, local crime statistics, and the availability of similar homes. Also, the land itself will be included in the home’s Market Value, although it will not be covered by the homeowners policy.
Average Clause ?
The Underinsurance (average) Clause contained in a policy will be applied in the event of a loss if it is determined that the subject property is underinsured, in which instance you will be considered your own insurer for the difference between the sum insured and the full replacement value of the property, and will therefore assume your shared portion of any loss which may occur.
Rebuilding cost of the home $200,000
Policy Sum Insured $100,000
Amount Claimed $ 75,000
Amount Paid $ 37,500
In the above example, the policy sum insured is only 50% of the rebuilding cost (i.e. $100,000/$200,000). The degree of underinsurance is 50%, so the amount claimed ($75,000) is reduced by 50% to $37,500.