In many instances I come across cases where there is great confusion when it comes to Replacement Value, even amongst some seasoned professionals.
What I am referring to here is where the replacement value of a property includes the cost of the land …. this is wholly incorrect because that is what is referred to as Development Cost – the cost of an entire development, including the land.
However, in the case of Replacement Cost or Value, reference is only made to the improvements to the land, as the land cannot be destroyed, for the most part.
So, when determining Replacement Value for insurance purposes, the cost of the land is explicitly excluded. Note well here, that Replacement Value does not equal Market Value – they are completely divorced from one another.
Note also that Reproduction Value is vastly different from Replacement Value, but more of this in the next installment.
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Blog written by Patrick 0’Connell
Operations Director of Spectrum Valuations & Asset Solutions (Pty) Ltd