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Is It possible for Insurance Replacement Cost Values to Be Higher Than New Construction Costs?

By August 19, 2020April 19th, 2022Education, Property Maintenance

The short answer is yes. Say you have just experienced a massive fire at one of your rental properties.  After the initial turmoil, and immense disruption to your business, you’re faced with many decisions. Most decisions ultimately focus on one question: How can I resume operations as quickly as possible? A major part of this process typically includes repairing or rebuilding the damaged property.

That’s where insurance comes in. The basic intent of property damage and business interruption coverage is to repair or replace damaged property and to reimburse the insured for lost profits.

You reach out to your experienced Millers Mutual insurance agent, who fortunately, secured replacement cost values in your Businessowners Policy for your affected property. You get the estimates to repair your building and are shocked at the amount it will cost. The cost comes in higher than your brand-new construction.

You may be scratching your head trying to figure out how insurance replacement costs can be more than the cost of new construction but there are many factors that contribute to it. Let’s take a look at the main culprits impacting the increase in cost.

Economy of Scale: When a builder has multiple properties under construction at the same time, items can be purchased in bulk, resulting in materials costing less per home. Everything from lumber to light fixtures can be discounted when purchased in large volumes. For your rental property, you may need just one new kitchen sink, or bathtub to replace the ones destroyed in a fire. You won’t be able to factor in those economies of scale in your replacement costs.

Demolition/Debris Removal: Typically, new property construction takes place on open ground or only minor excavation is needed, such as removal of shrubs or trees. When a rebuild occurs, there will be demolition costs and debris removal needed prior to replacing the damaged property, such as removing a roof and rebuilding from the top down. This is far more time consuming and labor intensive than building from the ground up.

Labor: The largest share of building costs is typically labor. When a builder has several projects under construction, work can be scheduled for the most efficient use of a contractor’s time. A builder can have contractors bounce back and forth from different properties based on their readiness. When only one property is being built, the same kind of efficient scheduling is impossible. Throw into the mix the time sensitivity when rebuilding property, and you may need to pay more to have a contractor squeeze your property into their schedule.

Building Codes: Building codes are frequently being upgraded to meet higher levels of protection from various catastrophes such as fires and earthquakes. Think of it like this: If you are rebuilding your property, new building codes may require you to replace the roof with fire-retardant materials. You may build a brand-new dwelling and two years later, the code changes which would add to reconstruction costs to upgrade the property to current code. Building code changes can add thousands of dollars to the cost of repairing/restoring a damaged building.

Additional Finishes After Initial Construction: Did you finish the basement in your rental dwelling to make it more appealing to new renters after the initial build of the property? Keep in mind, any additional finishes after the construction such as an updated deck/or basement could drive your replacement costs up from initial construction.

Interested in working with a Millers Mutual Insurance Agent? Check out our Find an Agent page to find one in your area.