If your home or rental property is destroyed in a fire, hurricane, tornado, or another disaster, you’ll be glad you have it insured for the full value – or do you? If your policy limit only covers the actual cash value of your property, your payout may not be enough to cover the full replacement cost. To make sure you’re securing enough coverage, you need to be familiar with the home replacement cost calculator rules for your home or rental property. 

What Is Replacement Cost?

When determining the value of a property for insurance purposes, one of two primary valuation methods may be used. 

One of these methods is the actual cash value. FEMA defines this as “the cost to replace an insured item of property at the time of loss, less the value of physical depreciation.” In other words, it’s the current value of the property once depreciation has been accounted for. According to the National Association of Insurance Commissioners (NAIC), insurers typically calculate the depreciation based on the condition of the property when the damage occurred, what a new item would cost, and how long the new item can be expected to last.

The other valuation method is replacement cost. FEMA defines this as “the cost to replace the property with the same kind of material and construction without deduction for depreciation.” In other words, this is how much it costs to replace the property using similar materials and quality.

Although the difference may seem trivial, it is often significant when a total loss claim or significant property damage occurs. This may be easiest to see when looking at auto insurance. Cars typically depreciate or lose value, very quickly after purchase. If you buy a new car for $40,000, a year later, the fair market value may only be around $32,000, even if you’ve done a decent job of maintaining the vehicle. If the vehicle is stolen at this point, an insurance policy that only pays the actual cash value may not provide enough cash to buy a new vehicle or even to pay off the remainder of the loan you took out to purchase the car. 

The same general principle applies to homeowners insurance and landlord’s insurance. The value of your property may not be the same as the replacement cost, and this can become a problem when you have a claim. 

When Is a Replacement Cost Estimate Needed?

Whether you’re talking about a rental property or your personal residence, understanding the difference between replacement cost coverage and actual cash value coverage is important. 

Replacement cost coverage can cost more, but it can also mean that you’ll receive a bigger payout. If you purchase an actual cash value policy, depreciation of your building may mean that the payout isn’t big enough to cover the repairs. To return the property to its previous state, you’ll have to make up the difference yourself. If you’re a landlord, financial troubles could delay the rebuilding process, and that could result in lost income. The good news is that Honeycomb’s landlord insurance can provide the replacement cost coverage you need so you’ll be covered.

Replacement costs vary from state to state

Property replacement costs can vary significantly from state to state. There are many factors that can contribute to this variation, including the cost of living in a particular area, the availability and cost of labor and materials, and local regulations and taxes. For example, the cost of replacing a roof may be higher in a state with a higher cost of living, such as California, compared to a state with a lower cost of living, such as Texas. Below you’ll find a table of the estimated replacement costs in states where Honeycomb operates:

State Replacement Cost Per Sqft

How to Determine the Replacement Cost of a Home

Many factors can impact the cost of replacing or repairing a property. These factors can include the following:

  • Building materials. If your roof has expensive slate tiles, you probably don’t want to end up with a cheap asphalt roof after the repairs. That would be a downgrade. When estimating the replacement cost of a building, it’s important to consider the cost of building materials that are similar in kind and quality. Over the years, the cost of various materials can change. 
  • Size. A larger building will take more time to repair, and labor will increase the total costs, so the size of the building can impact the replacement cost.
    Foundation: The foundation can impact repair costs in numerous ways. Foundations that are more difficult to repair due to the foundation type or that need more work due to the type and degree of damage will contribute to higher costs. 
  • Age of building. An older building may have wear and tear issues that can impact the fair market value of the house. At the same time, older buildings may be more expensive to repair because they involve materials that are less common now.
  • Building codes. New buildings need to meet current building codes. Buildings that pre-date these codes may be grandfathered in, but if repairs are needed, these repairs may need to adhere to the new codes. This can increase the repair costs. 
  • Supply chain issues. After a major natural disaster, such as a wildfire or hurricane, building materials can be in high demand and short supply. These shortages can result in price increases. 
  • Labor shortages. As with building materials, labor shortages can lead to price increases in the aftermath of a widespread disaster. 

Do Landlords Need a Home Insurance Replacement Cost Calculator?

At this point, you may be thinking that it will be extremely complicated to calculate the replacement cost of your property. The good news is that you don’t have to. Your insurer will do it for you. Your insurer may also recommend certain coverage add-ons based on your situation and needs. For example, if you own an older building that does not adhere to modern building codes, your insurer may recommend ordinance and law coverage.

Even though you don’t need to calculate your building’s replacement cost, it’s still smart to understand the basics of replacement cost versus actual cash value. This way, you know what kind of coverage you need. You can make sure you’re not underinsured, and you won’t be caught off guard if you ever need to file a claim. 

The Next Steps to Take

Now that you understand how insurers calculate the replacement cost of your building, you’re ready to get the coverage you need to protect your rental property.

  • Get a quote. At Honeycomb, we offer a quick, easy, and transparent online quote process.
  • Review the proposal in detail. Go over the terms, using your knowledge of replacement costs to make sure you’re happy with the limits.
  • Purchase coverage. Once you’re satisfied that you’re getting the coverage you need, you can purchase the policy with the peace of mind that you’ve made an informed decision.

Insurance jargon can get confusing, and a lot of people don’t understand the difference between replacement cost value and actual cash value until they’re dealing with a claim. At Honeycomb, we strive to bring simplicity and transparency to real estate insurance.