Ask an Instructor: Replacement Cost
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Thursday, August 23, 2018 in Ask an Instructor
ISA members are invited to send in their questions on all things appraising and education to ISA's instructors. One of ISA's instructors will share answers on the ISA Now Blog. Please send questions to directorofeducation@isa-appraisers.org.
Question: I'm confused as to what to call the insurance value in my appraisal report. Some people call it Replacement Cost, some call it Replacement Value, and some call it Replacement Cost Value. What is the right term that I should be using?
Answer: ISA prefers the term Replacement Cost to be used in insurance appraisals. Why is that? Let's go back to Lesson 1 in the Core Course. Cost is the amount of money paid for an item. Unlike value, cost is not always justified. Just because you paid X amount of dollars for an item, doesn't mean it's worth that much. The monetary worth of an object is its value. Thus, for insurance, when you are estimating the cost to replace an item (either by production, reproduction, or purchase), the correct term to use is Replacement Cost. Other organizations may use the term Replacement Value to mean the same thing as Replacement Cost, but we wish to differentiate ourselves by using the proper words. As for Replacement Cost Value, this term is sometimes used by insurance companies to mean Replacement Cost or Replacement Value, but really it only causes more confusion. Replacement Cost is the most correct term to use.
Director of Education