If you’ve ever spoken with an insurance agent about your home or business property you know one of the first questions asked is “how much coverage do you need?” All too often, that question is met with more questions than answers. One of the most important components of determining premium is the proper calculation of the replacement cost valuation (RCV). Unfortunately, many insureds are unaware or surprised to find that the RCV is not the same as the market valuation.

While the market value of a home or building may change from year to year (or month to month) depending on the fluctuations in the market, the RCV is not subject to the same market forces that determine the cost (labor & material) to rebuild a home or building. In other words, I could spend $1,000,000 for a cardboard box on Rodeo Drive in Beverly Hills – but if the box blew away, it may only cost me a few bucks to replace. Conversely, one might buy a foreclosed home for far less than they could build it for.

Many agents have replacement cost estimators that can help you properly determine an adequate cost of replacing your home if a total loss occurs. These calculators take into account such factors such as size, construction method (i.e. frame vs. concrete block) and quality of the building materials used in the construction process (marble floors vs. linoleum floors).

For commercial buildings a good option for more specific valuations is to obtain an insurance to value appraisal from a licensed contractor or appraiser. Unfortunately, many commercial building owners fail to update these values from year to year which can be problematic if tenant build-out changes or if building additions are made. Additionally, under-insured buildings suffering a partial loss could be staring down the barrel of the co-insurance clause. With an over insured home or building you could be running the risk of insurance coverage you’ll never receive the benefit of.

Establishing adequate property and home insurance values is an ongoing risk management activity that must be addressed annually with your agent that must be addressed independently of other market conditions. It’s important to remember that without determining the proper replacement cost valuation of your home or property, you could run the risk of over insuring your home just as easily as under-insuring it. Talk to your agent today or request a free quote and ask for a replacement cost valuation, many agents have access to the Marshall & Swift cost estimator and would be happy to do so.