How a building loss is valued is the broker's most consequential underwriting decision.
- Replacement cost (RC): pays the cost to repair or replace with materials of like kind and quality at today's prices, without deduction for depreciation. Standard on most homeowner policies, conditional on the insured maintaining insurance to value at the percentage required (commonly 100% of replacement cost) and actually replacing the damaged property.
- Actual cash value (ACV): pays replacement cost minus depreciation for age, wear, and obsolescence. The fallback when RC conditions are not met (e.g., the insured under-insures, fails to rebuild on the same site, or carries an ACV form).
- Guaranteed replacement cost: an endorsement (offered by many insurers) that pays the actual cost to rebuild even if it exceeds the policy limit, conditional on the insured maintaining insurance to value as the insurer initially valued the building and reporting significant renovations. The most generous building valuation available.
- Insurance to value: the broker's recurring duty. Re-evaluate rebuild costs at each renewal; construction inflation can rapidly erode adequacy.
If a building is insured for less than the percentage required (often 80% or 100% of replacement cost), the policy converts to actual cash value valuation or applies a co-insurance-style penalty, depending on the wording.
Common mistake: confusing market value with replacement cost. Replacement cost is the cost to rebuild on the same site to current code; market value reflects land value, neighbourhood, and condition, and is irrelevant to most insurance valuations.
⚠️ Trap: An insured who chooses not to rebuild after a total loss generally receives ACV, not RC, even under a replacement cost policy. The broker should explain this at policy delivery.
Recall: What is the difference between RC and ACV at claim time? What additional protection does guaranteed replacement cost add, and on what condition?