There are some characteristics that overlap (supply and demand is a factor, especially when considering materials and labor costs – cost of lumber, anyone?), but unlike the market value, the replacement cost of a property is based less on external factors and more on the building’s physical features and characteristics.
The insurance industry, along with some appraisers and lenders, uses a tool called Marshall & Swift/Boeckh (“MSB” for short) to calculate the replacement cost. There are dozens of data points that are used when calculating the MSB, such as square footage, type of construction, number of stories, number of units, etc. This information is input into the system, and the estimated replacement cost is calculated.
This calculated MSB is what all insurance carriers use to determine whether
the building is being adequately insured.
How accurate are these replacement cost guides? My answer is: close-ish. I know that is a disappointing answer, but MSBs do tend to skew a bit higher than the true replacement cost for the sole reason that it is much better to be slightly over- insured than under- insured. If the MSB was providing cost guides that were lower than the true replacement cost, the insurance industry would face E&O claims that would bankrupt the entire industry! These guides are the cornerstone of how the insurance industry expects properties to be valued.
REPLACEMENT COST I S BASED MORE ON THE BU I LD I NG ' S PHYS I CAL FEATURES AND CHARATER I STI CS
And while the cost guides do have some flaws, no
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