Replacement cost

Replacement Cost - The replacement cost refers to the expenses that would be incurred to rebuild a building of the same type, quality, and size at the same location following its complete destruction. It serves as the primary basis for calculating home insurance premiums and determines whether a building is adequately insured in the event of a claim. A correctly determined replacement cost protects owners from the dangerous underinsurance trap and ensures full compensation in the event of a total loss.

How is the replacement cost determined?

The replacement cost includes all costs that would be required for the complete reconstruction of a building in an identical design - including:

• Material costs (masonry, roof, windows, doors, floors)
• Labor costs and ancillary construction expenses (architect’s fees, structural calculations)
• Government fees (building permit, regulatory requirements)
• Costs for demolition and disposal of damaged property

The land value is not included, as the land itself cannot be destroyed.

In insurance practice, the reconstruction value is generally not stated as a current euro amount, but is calculated using the so-called 1914 value. This involves determining the notional new construction value of a building in 1914 Goldmarks-a time when construction prices were stable prior to World War I. This 1914 value is then multiplied by the construction price index published annually by the German Insurance Association (GDV) to obtain the current reconstruction value. This method is known as floating replacement cost insurance and ensures that the sum insured is automatically adjusted to changes in construction prices without the need to manually update the policy each year.

The following factors are used to calculate the 1914 value:

• Living area and building volume
• Construction type (solid construction, wood-frame construction, prefabricated construction)
• Standard of finish (basic, medium, high-end)
• Roof shape and roof structure (flat roof, gable roof, converted attic)
• Number of stories and basement conversion
• Special features (floor heating, pool, double glazing)

Alternatively, an appraiser can determine the replacement value through a detailed individual assessment of the building-particularly recommended for historic buildings or properties with special features that cannot be accurately reflected using standard factors.

Avoid Underinsurance

One of the greatest risks with home insurance is underinsurance: If the sum insured is less than the actual replacement cost, the insurer will reduce the compensation proportionally in the event of a claim (known as the underinsurance ratio). For example, if the sum insured is only 80% of the replacement value, only 80% of the damage will be reimbursed-even in the case of partial damage, i.e., even if the entire building was not destroyed.

Specifically: In the case of fire damage amounting to 200,000 euros with a 20% underinsurance, the insurance company would reimburse only 160,000 euros-the owner must cover 40,000 euros out of pocket.

The most effective protection against underinsurance is the so-called waiver of underinsurance, which most insurers offer in conjunction with sliding-scale replacement-cost insurance. The prerequisite is that the 1914 value was determined correctly and that the building has not been significantly altered without notifying the insurer-for example, through additions, story additions, or high-quality renovations. We recommend having the 1914 value reviewed and adjusted as necessary after every major renovation so that the underinsurance waiver remains effective.

Replacement Cost and Historic Preservation

For historic buildings, the replacement cost can be significantly higher than the standard value, as faithful reconstruction requires special craftsmanship, historic materials, and compliance with regulatory requirements (from the historic preservation authority). Historic stucco, special wooden structures, or traditional bricks that are no longer manufactured industrially drive reconstruction costs far beyond the standard for new construction. Owners of listed buildings should definitely commission an individual expert appraisal to determine the reconstruction value.

Practical Tip for Nuremberg and Franconia

In the Nuremberg metropolitan region, construction costs have risen significantly in recent years, which has driven up the reconstruction value of many buildings considerably. This is particularly true for the numerous post-war buildings from the 1950s and 1960s in neighborhoods such as Langwasser, Schweinau, or Gibitzenhof, which have since been extensively modernized; the value originally determined in 1914 often no longer corresponds to the actual condition of the building.

For historic buildings in Nuremberg’s Old Town or the Fürth Wilhelminian-style neighborhoods, the reconstruction value may be significantly higher than the standard value due to special regulations and craftsmanship requirements. We advise property owners in the region to have the reconstruction value reviewed by an independent appraiser every five to ten years and to inform the insurer after every modernization-especially following heating system replacements and energy-efficiency renovations, which have been carried out in many existing buildings in Nuremberg in recent years.

Frequently Asked Questions About Reconstruction Value

What is the difference between replacement cost and market value?

The replacement cost exclusively quantifies the costs of constructing a new building of the same design and does not take into account the land value or market supply and demand. The market value, on the other hand, indicates the price that could be achieved in a sale on the open market and includes the land value, location, and market conditions. The replacement cost can therefore be significantly higher or lower than the market value-often significantly lower in sought-after locations (where high land value drives up the market value), and often significantly higher for specialized buildings.

When should the replacement cost be recalculated?

A recalculation is always advisable if the building has undergone significant changes-such as an addition, a roof extension, the installation of a high-quality heating system, or a major energy-efficient renovation. When purchasing an existing property, we also recommend verifying the 1914 value listed in the insurance policy, as the previous owner may not have reported any renovations. This review is cost-effective and protects against costly underinsurance in the event of a claim.

Does the replacement value also apply to outbuildings?

Outbuildings such as garages, carports, garden sheds, or storage sheds are only covered under residential building insurance if they are explicitly listed in the insurance policy and their value has been included in the calculation of the replacement value. We recommend reporting all outbuildings belonging to the property to the insurer and having them included in the policy to avoid gaps in coverage in the event of a claim. For newly built garages or carports-which are becoming increasingly popular in residential areas of Nuremberg-the sum insured should be adjusted immediately upon completion.

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