One of the most important parts of insurance coverage is making sure that you are properly covered in the event of a loss. An insurance policy will usually only cover a certain amount, so making sure that your policy covers the replacement cost is essential to proper coverage.

This post is meant to be a primer on the different factors to consider when purchasing insurance coverage for your buildings. A proper understanding of these terms is a crucial aspect to protecting your assets in the face of damage or loss. The total amount it will cost to replace and cover your losses is called the "Replacement Cost Valuation" or "RCV". Calculating your RCV is a process that requires careful consideration of many factors.

Some of the most essential factors to consider when evaluating your RCV are:

Building Replacement Cost Including Mechanical Systems:

This is the cost to replace the physical elements of your building. This should include not only the building's structural components but also mechanical systems such as HVAC, plumbing, and electrical systems. These systems are integral to the functionality and value of your building.

A common mistake is that owners will only ensure the material costs, and not the mechanical structures and be left with the bill to make a replaced building functional and habitable.

Bylaws and Code Upgrades:

Building codes and regulations may have evolved or changed since your building was constructed. Rebuilding may include not only the replacement costs for materials, but expenses in bringing the property up to modern codes and standards. These upgrades can include updated safety and accessibility features, energy efficiency or environmental requirements, and many other facts. Including these costs in any assessment is therefore crucial.

Debris Removal of Existing Structure:

Before you rebuild, you must remove the debris from the site. This removal can be time consuming, costly, and may require compliance with local bylaws or regulations, especially if there are hazardous materials involved. These costs should always be factored into your RCV Assessment.

Ability to Build at a Different Location:

It is possible that you're building simply cannot be rebuilt on the initial site. If the building was grandfathered into significantly changed regulations or zoning bylaws, then a rebuild on the same land may not be an option. The cost of purchasing or leasing a new plot of land should therefore be considered in any RCV Assessment.

These are some of the key factors to consider when assessing the RCV of your property. In addition, however, there are other factors to consider:

  • Construction Materials: The type of material used to construct your building (concrete vs. wood frame) can significantly impact the replacement cost. If the building needs a certain material to be properly used, you should be aware of that when assessing the RCV.
  • Fire Suppression Systems: A building equipped with fire suppression systems may have lower insurance premiums, but it will also require more frequent maintenance and upkeep costs.
  • Elevators and Accessibility features: A rebuild will likely need to meet modern standards for accessibility, but those features may not be present in the original building.
  • Increased power needs: A new building may have greater, or different, power needs than the original construction.
  • Exterior Features: Your building is often more than just what's on the inside. Fencing, parking, walkways, and lighting should all be considered when assessing RCV.
  • Bylaws and Zoning: While they may have changed between initial construction and the purchase of your policy, they could also change between the purchase of insurance and eventual incident. Be proactive and factor in the possibility of future changes, as well as any known changes.

Calculating RCV is a complex and technical process. We recommend having a professional appraisal conducted to ensure your property is fully protected.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.