What About Other Types of Replacement Cost Valuation?
we discussed what replacement cost valuation was and how it is calculated.
Today I want to discuss extended replacement cost and how it provides for
additional coverage in the event of a regional or national emergency. The value
is usually represented by a percentage of the building value such as 25% or 50%
extended replacement cost which would mean that the insurance carrier would
provide and additional 25% or 50% replacement cost value to keep the insurance coverage
within the actual cost of replacement. So if your building is insured for $100,000 and you have extended replacement cost of 25% the insurance carrier will provide for an extra $25,000 in replacement cost coverage: $100,000 X 25% = $25,000 + $100,000 = $125,000.
replacement cost is not intended as a cure for underinsuring your building.
According to the terms of your insurance policy you are obligated to maintain
replacement cost on your building to a certain percentage of the actual
replacement cost such as 80%, 90% or even 100%. If you recall, this is co-insurance and we discussed this in our last blog.
When Hurricane Katrina struck New Orleans the vast amount of rebuilding
actually led to shortages of building materials regionally and around the
United States. And, depending on your proximity to Louisiana it may have been
very difficult to find licensed contractors who were not already on the job
rebuilding. If you were unfortunate to have had a loss or a complete loss of
your building during that time frame there was a real possibility that the cost
to rebuild would have exceeded your replacement cost value. That means that you would have had to pay the difference.
replacement cost steps in during crises such as the one described to ensure
that there is enough coverage even during a regional catastrophe. Think of the
terrible tragedies where an entire community is destroyed by a tornado or
multiple communities completely destroyed by a hurricane or fire. There will be
shortages of materials and qualified contractors and the cost to repair or
replace your home and business will increase dramatically.
Discuss the insurance needs of your building
with your agent to make certain that you have enough coverage now today and in
the future. We hope that you never need to use the coverage but making certain
that it is there will allow your family and your business to recover in the
event of a crisis.