Reconstruction versus New Construction

Information provided by Marshall & Swift/Boeckh

With the changes in the insurance regulations and with the rising insurance costs, many individuals are looking for ways to ensure that their homes are protected while also reducing their insurance costs. However, what you don't realize is that some of the ways to reduce your insurance costs is placing you at risk.

Today, many reasons individuals get property valuation is due to re-financing, a new mortgage, home equity line of credit, establishing a selling price and for insurance purposes. However, the way property valuation is calculated can vary depending on its ultimate and methodology.

Whether properties are insured adequately depends on the type of replacement cost estimate they depend on, the coverage they purchased, and that magic ratio. Insurance to Value (ITV). The ITV estimating methodologies are designed to calculate property estimates that represent the fullest exposure and insurance carrier may experience in the event of a loss.

Because Reconstruction Cost is more comprehensive than Replacement Cost New, it is a better representation of what a carrier may expect to pay following a loss, and thus the most reliable method for determining Insurance to Value at the policy inception or renewal.

The distinctions between Replacement Cost New valuations and Reconstruction Cost valuations are important to understand because a carrier's goal is to provide the homeowner with an equitable and fair settlement. Additionally, because policy and settlement terms are frequently subject to negotiation and court interpretation, it is essential that carriers receive premiums based on the fullest exposure on each building - the building's Reconstruction Cost.

Research shows the the actual cost to reconstruct a building after a total loss is on average greater than Replacement Cost New (Appraisal). This is because Replacement Cost New valuations do not include costs arising out of current building codes or from a variety of costs and fees which were presented above and these are commonly present in total losses.

Have questions? Call us! We'll help you understand.