Glossary
Financial Concepts
Replacement Cost
The estimated cost to rebuild a property at current construction prices, the value basis most commercial property insurance policies are written on, distinct from the property's market value or depreciated book value. A mismatch between a property's actual replacement cost and its stated insured value signals either underinsurance risk to the landlord or an inflated premium pass-through to tenants.
Firm impact
If a property is insured well above its actual replacement cost, tenants may be funding a premium larger than the coverage justifies. If it's insured well below replacement cost, that's a landlord risk issue, but it can also mean the premium tenants pay understates what proper coverage would cost, a sign the insurance line needs a closer look either way.
How this gets abused
A property with an estimated replacement cost of $12 million carries a property insurance policy with a stated insured value of $16 million, a gap well outside normal insurer cushions. The resulting premium, passed through to tenants, is priced against coverage the property doesn't actually need.
Practitioner note
Request the insurer's replacement cost estimate, usually generated through a standard construction-cost valuation, and compare it against the stated insured value on the policy declarations page. A material mismatch either direction is worth raising with the landlord before accepting the premium as reasonable.
FAQ
Questions about replacement cost
Is replacement cost the same as a property's market value?
No. Replacement cost estimates what it would cost to rebuild the structure today. Market value reflects what a buyer would pay for the property, including the land, which insurance doesn't cover.
Why should a firm care about the replacement cost figure behind a CAM insurance charge?
Because the premium tenants fund through CAM is priced against the insured value, not the market value. If that insured value is inflated relative to actual replacement cost, tenants are funding coverage the property doesn't need.
You know the term. Now check the math.
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