Author: Chris Boggs

Replacement cost estimators (RCEs) are a ubiquitous part of the property insurance underwriting process. Agents writing either commercial property or homeowners' coverage have undoubtedly completed a replacement cost estimator.

Although these RCEs are common, few have considered the reality of these estimators. The question most never ask about these forms is, what is a Replacement Cost Estimator?

To adequately answer this question to make proper use of these property underwriting necessities requires a detailed review of the meaning behind “RCE."

This analysis begins by defining “Replacement Cost" and “Estimator." With this information, the utility of an RCE can be better understood.

• Replacement Cost: “The cost of a substitute asset that is equivalent to an asset currently held," – Black's Law Dictionary, 10^th Edition.  “The amount of money it costs to replace something that is damaged, lost, stolen, etc. with something new," – Cambridge Dictionary. “The cost of replacing property with property of like kind and equal quality or effectiveness," – Merriam-Webster.

• Estimator: A valuation document providing precision guess work based on unreliable data observed and input by those not trained or licensed in property appraisals.

Recombining the phrase unveils the truth. A replacement cost estimator is nothing more than an organized guess. The truth is in the title, it's an ESTIMATOR that cannot be held out as exact! IT'S A GUESS!

Do not portray the value generated by these estimators as the truth. Clients do not understand the reality surrounding a RCE. When agents complete the estimator and present the findings to the insured, that becomes truth to the insured – unless you explain the reality.

Because replacement cost estimators are a key property underwriting tool, we cannot avoid them. However, agents can hedge against the errors and omissions (E&O) dangers found in any RCE. Seven steps to reduce the E&O pitfalls common to replacement cost estimators are the following.

1. Provide a disclaimer detailing the reality of a replacement cost estimator. An example may read: “Building and personal property coverage limits are estimates only and were arrived at based on information provided by the policyholder and input into industry standard software used to estimate replacement costs. The actual cost to rebuild the structure or replace the personal property may exceed the policy limits. The agency makes no assurances or guarantees that the policy limits provided will be adequate to rebuild the structure or replace personal property. If there is doubt about the adequacy of the policy limits, the policyholder should obtain a professional appraisal or obtain the services of a qualified company or builder who is able to provide more exacting replacement cost estimates."
2. Explain the reality of a replacement cost estimator (beyond the disclaimer).
3. Provide the insured a copy of their replacement cost estimator, highlighting several key points of data used in completing the worksheet such as year built, construction materials, square footage, updates, etc. The insured should review and sign that the information used is correct. 
4. Run several RCEs using the range of construction quality from basic to custom. This provides a range of values to present to the insured (and is a clear example of the possible variations in values developed).
5. Always have the insured choose the replacement cost ultimately used. Remember, a RCE is only an estimate; the insured should make the final decision on the value used in the policy.
6. Run an estimator at every renewal. This seems cumbersome, but this allows a better discussion with the insured. 
7. Never provide the RCE estimate to lenders. It is the lender's responsibility to evaluage the amount of insurance coverage that protects their interests.
   

Have the insured confirm the chosen replacement cost by signature.

Replacement cost estimators are a tool in the property underwriting process, but they are not intended to be exact. They are an organized guess based on data that changes, at times very quickly. Because an RCE is an estimate and can become outdated very quickly, the E&O exposure is high.

When E&O exposures are high, protective procedures are mandatory!