UNDERSTANDING DIFFERENCE BETWEEN REPRODUCTION, RECONSTRUCTION, REPLACEMENT & REINSTATEMENT

UNDERSTANDING DIFFERENCE BETWEEN REPRODUCTION, RECONSTRUCTION, REPLACEMENT & REINSTATEMENT

 

REPRODUCTION COST   

The amount required to reproduce a duplicate of the entire property. This is very similar to replacement cost. However, where replacement cost considers like utility and function, reproduction cost considers like kind and materials. The goal would be to replace the structure as an exact replica of the original. Reproduction cost is the cost to construct an exact duplicate of the subject structure at today’s costs. 

RECONSTRUCTION COST  

The amount required to replicate a building of like kind and materials with the added costs associated with reconstruction as opposed to new construction. Factors such as time urgency, debris removal, and hazardous material and mold concerns are all used to formulate reconstruction costs. As many buildings may not have these concerns, reconstruction cost can produce an inflated value and lead to over payment on premiums. Reconstruction cost is defined as the cost to replicate the building, at current construction prices, using the like kind and quality materials, construction standards, design, layout and quality. The MSB reconstruction cost includes additional expenses related to repair and restoration contractors’ fees, the construction process itself, the location of the property, demolition costs and debris removal. These factors create a valuation that is higher than a new construction.

REPLACEMENT COST

It is defined as the cost to construct or replace an entire building with equal quality and construction. A replacement cost does not include site improvements, demolition, debris removal, fees, premium material costs and other costs associated with the construction process. Replacement cost also assumes that current building material, design or layout will be available and used. Replacement cost is the cost to construct a structure with the same usefulness (utility) as a comparable structure using today’s materials and standards.

For example, you may use the cost approach to appraise a house with plaster walls. A reproduction cost estimate requires estimating the cost to construct plaster walls. A replacement cost estimate, however, estimates the cost to put up sheet rock walls according to the current standard.

Replacement cost is most often used in the cost approach. Reproduction cost would be used for say historically or architecturally significant structures.

WHAT IS REINSTATEMENT CLAUSE

A reinstatement clause states when coverage terms are reset after the insured files a claim. Individuals and businesses purchase insurance policies to cover themselves from damages or losses caused by specific perils, such as fires and floods. Coverage is triggered when the damage or loss occurs, at which point the insured can file a claim to receive money to cover damages.

The amount that the insured can recoup from the insurer is set at a maximum amount, called the coverage limit. This limit may be set on a per occurrence, per risk basis, or aggregate loss basis.

Insurance companies that are still processing a claim may want to limit any further coverage for an insured customer until the current claim is paid out. In order to be covered from future damages while an existing claim is still active, the insured customer would have to make sure that the policy is reset after the first damage or loss and the coverage is renewed right away. This is done through a reinstatement clause.

Reinstatement clauses indicate the point at which coverage restarts. The restart may be triggered by a claim being filed or by a claim being paid out by the insurer. Additionally, the clause will indicate whether the coverage limit is reset or whether the same limit applies.

Insurance Policy Reinstatement

The ability to reinstate a policy is not guaranteed by law, so the availability of a reinstatement clause may differ between insurance providers and policies when reinstating a previously expired policy. It largely depends on how much time has elapsed since an insurance policy has expired, the company writing the policy, and the product type being reinstated. It might be less expensive to get a new insurance policy than to reinstate an old policy. 

Example of a Reinstatement Clause

For example, a business purchases a property insurance policy, and the business operates in an area that occasionally has floods, but the frequency of the floods is typically low. Over the course of the summer, the area receives more rain than expected, and the business is damaged by floodwaters. After the business filed a claim for this damage—but before the claim was settled—another storm passed through the area and caused additional damage. Because the policy had a reinstatement clause that reset coverage after the first claim was filed, the policyholder was able to make a subsequent claim following this second, separate flood.