Why is my replacement cost more than my home or building is worth?

Definition:  Subject to the terms and conditions in your policy, replacement cost coverage provides
for replacement of your property with brand new, identical or equivalent property.  

My home or business building isn't worth that much.
It is not unusual for the replacement value of your home or business building to be more expensive
than the market value.  Market values can fluctuate upward and downward over time due to supply
and demand.  Market values can also be affected by where a home is located.  However,
Replacement Value is the cost to build a brand new home or building, and therefore is not affected by
or related to the market value.  

It didn't cost that much to build my home or building.  
When ever a customer tells me they know how much it cost to build their home or business building,
we suggest that they consider adding 15-20% to get to replacement value.  Here are some reasons
why as follows:

Economies of Scale   When rebuilding a home after a loss, such as a fire or tornado, many of the
economies of scale are not present.  When builders construct entire neighborhoods or several similar
style homes in a period of time they often negotiate special pricing on materials and fixtures.  When
building a single unique home, they may not have the same buying power.  In fact, extra costs may
be incurred trying to find discontinued materials or fixtures that had been used in the original home.

Debris Removal  Tearing down damaged portions of a structure and hauling away the damaged
material adds cost.  These additional costs are included in your replacement cost.  It is not unusual to
incur $10,000 to $25,000 in debris removal costs.  

Negotiating   There may not be as much negotiating available to you due to time constraints,
preference of builder, etc. when you have an untimely loss.  Most customers wish to be back in their
home or business building as quickly as possible.  The selected builder, however, may already have a
full load of work at the time.  In order to complete your house in a timely manner, it may require
additional labor including overtime wages to be paid.

Inflation of building materials & labor  Finally, building materials and labor tend to increase overtime.  
Even if only 2-3% in a given year, that can mean another $6,000-9,000 on a $300,000 property.

These explanations are intended to provide a simple understanding of some of the basic provisions
found in most insurance policies.  Sometimes simple explanations do not address all of the particular
circumstances of a claim, nor may they take into consideration case law or other provisions within a
policy.  This FAQ section of the website does not replace, alter or amend any language in your policy, its
terms, conditions or exclusions.  

What is the Michigan
Catastrophic Claims
Association (MCCA)?

Why is it important to pay
my bill on time?

What if I don't replace my
property, does the
insurance company still pay
replacement cost?

Should I have my car
windshield repaired or

What do I have to do to
have my claim paid?  What
are my responsibilities
during a claim?

Why do insurance
companies use insurance
score discounts?  Is it fair?

Why is my replacement cost
more than my home or
building is worth?
_Frequent Questions