Replacement Cost Vs. Reproduction Cost
Two concepts that you will need to understand in relation to homeowner’s insurance are Replacement Cost and Reproduction Cost. Fundamentals of Real Estate Appraisal (8TH Edition), distinguishes the two as follows:
“Reproduction cost is the dollar amount required to construct an exact duplicate of improvements to the subject property at prices current as of the effective date. The replacement cost is the dollar amount required to construct improvements of equal utility using current construction methods and materials.” Read also: The Appropriate Coverage Amount For Your Insurance Policy.
For newer homes, the difference between the two is normally indistinguishable. With older and custom homes, however, there can be a dramatic difference. Your homeowner’s policy will typically use replacement cost. If your home were destroyed, they would pay out based on the cost it would take to rebuild a similar home today.
For example, let’s say that a 10 year old, 1600 square foot home is destroyed by a fire. The insurance policy provides for replacement cost. The insurer would determine the amount of money that it would cost to build a 1600 square foot home of the same construction quality as the original house. Read also: Taking an Inventory Video For Your Homeowner's Insurance Policy.
The difference between replacement cost and reproduction cost does not become significant until you consider older, customized homes. Consider a 1500 square foot home built in 1920 with ornate woodwork, 12 foot ceilings, hand-carved built-in bookcases, and stained glass windows. Reproduction cost would be the dollar amount required to duplicate the home with the same amenities as the original using current construction costs and methods.
Replacement cost would be the dollar amount required to simply build a new 1500 square foot home with the same utility, or usefulness, as the original house. Since 12 foot ceilings are not standard and do not offer any particular usefulness to the home (assuming the occupants are not 11 feet tall), the new costs would include on the standard 8 foot ceilings. Similarly, the new costs would include standard windows and molding, not the specialized construction of the original. Read also: What You Should Know About Homeowner's Insurance.
If you are insuring a restored older home, or a home with many particular customizations, you may want to consider a reproduction cost policy. It will certainly cost more in premiums than the more standard replacement cost policy, but it will protect your one of a kind home more completely than the standard policy would.