Insuring to Value



A Real Estate or Market Appraisal of a building is not an Insurance Appraisal. Comparing pricing of other similar buildings do not provide the cost to rebuild a building of like, kind and quality on the same site. Here is why.



The real estate appraisal industry recognizes three (3) standard valuation approaches:

  1. Cost Approach
  2. Market Approach
  3. Income Approach



The logic behind the cost approach is that a prudent investor would pay no more for a property than the cost of replacement of a substitute property with the same utility as the subject. Therefore, if a property is new, the current cost of reproducing that equivalent tends to establish the cost of replacement, however, once the property ages, then the economic value of that property in the terms of a chattel demises.



In this approach, the value of a property is estimated through analysis of recent sales of comparable property. It is employed in the valuation of the property for which there is a known active market. This approach to value will not reflect an accurate limit for insuring to value.



The Income Approach considers value in relation to the present worth of the future benefits derived from ownership and is usually measured through the capitalization of a specific level of income that a piece of the property or equipment can produce.

This approach is most applicable to investment and general use properties where there is an established and identifiable rental market. This approach to value will not reflect an accurate limit for insuring to value.



In any appraisal study, all three approaches to value must be considered, as one or more may be applicable to the subject property. In some situations, elements of two, or all three approaches may be combined to reach a value conclusion.


For this appraisal, our primary emphasis in concluding an opinion of value would be placed on the Cost Approach. This approach being best suited to providing an estimate of the Replacement Cost New for insurance placement purposes, as insurance premiums are normally based on replacement cost and not market value.


Therefore, the market and income approaches to value will not be presented in an insurance report; it being concluded that they would not add to the validity or credibility of the appraisal.



An insurance appraisal is a cost appraisal, that is, “the cost to replace or reproduce the property in like kind.” Construction costs are broadly segregated into the direct and indirect costs associated with the assembly of the building. Cost estimates are developed through the examination of the direct and indirect costs associated with any facility. Direct costs represent the materials and labour necessary to construct and install the components of an operating facility. Indirect costs are the expenditures not directly associated with the facility construction and can include such items as architect fees, permits, consulting fees, or any other cost item not directly associated with the development of a building site. The sums of direct and indirect costs represent the total expenditures necessary to completely build a facility.


The cost approach begins with a cost estimate of the current construction materials, and labour required in assembling a building with the nearest construction utility to the subject property under appraisal.


Conceptually, there is a difference between the terms reproduction cost and replacement cost. They are frequently used as synonymous terms, even within the appraisal profession and since their terms are so commonly used interchangeably it might be helpful to compare the concepts of reproduction and replacement.


Reproduction Cost contemplates the reproducing of a building’s design with identical construction materials and installation techniques and the replacement of building equipment with identical substitutes of the same operating capacity without regard for technological advances. The challenge in producing reproduction cost estimates increases with the age of a facility. For instance, obsolete equipment may no longer be available. Revisions to construction standards and modifications to building codes and designs also present obstacles when estimating reproduction costs of older facilities.


The Principle of Substitution is an economic principle stating that the price of a commodity tends to be no higher than the price of a substitute having equal utility, available without undue delay. This is the basis of the Replacement Cost approach to value, where the costs found in this report are obtained directly from the restoration construction publication market. No system, whatever its degree of sophistication or detail, can be better than the market-derived information on which it is based.


Replacement Cost is the current cost to construct and install a substitute facility with the nearest equivalent utility in comparison to the subject property under appraisal. Replacement cost represents the cost of replacing the facility with a substitute facility capable of performing the same function recognizing the effects of technological changes as well as efficiency improvements. The replacement of the appraised facility with the most economical substitute facility uses modern construction materials, installation standards, and layout configuration without necessarily duplicating the size, flow or configuration of the appraised facility.


Estimates of replacement cost involve the consideration of improvements in materials, design features, layout and construction standards between the substitute facility and the subject facility. For instance, replacement cost analysis identifies the availability of substitute materials and equipment for the various original facility materials and equipment. Replacement cost analysis also examines improvements in design standards and features as well as changes in construction standards.


Materials and installation improvements are also an additional factor to consider when developing replacement cost estimates, particularly when an extended period of time has elapsed between the original construction of the facility under appraisal and the substitute facility.


In completing our analysis and estimate of the Replacement Cost New, a personal review of the data submitted and of current construction cost data was conducted by our team.


During the data collection phase we obtained information considered relevant in order to complete the appraisal assignment. An insurance appraiser’s mandate will include a review of the architectural and/or construction components and building services associated with the property, the gathering and analysis of appropriate data and the costing of the collected data as included in this report.


In conjunction with the above, we have considered, as applicable the following factors,

  • Size and degree of utility of the subject property.
  • Quality, type, and age of the subject property.
  • Current construction technology and building systems,
  • Current market prices for materials, labour contractor’s overhead profit, and fees.
  • Current local and national applicable taxes.


Within the cost approach there are three (3) distinct methods to develop costs.

  • The Unit Method
  • The Component Method
  • The Model Method


Remember, the key to a building insurance appraisal is rebuilding with like, kind and quality on the same site.


This is the big question here. The appraisal institute is not going to like the answer but here it is anyway. A BUILDING LOSS SPECIALIST who is a senior specialist with over 25 years’ experience in building losses. Here is why.


For insurance purposes there are two methods of providing building values including bylaws.



This approach considers the type of design of the building of which there are over 200; the type of construction of the building of which there are 5; the quality of construction of which there are up to 12; and adjustments for finishes and features. This approach would normally take an appraiser between 5 – 10 hours to complete depending upon the complexity of the building. This is the approach commonly considered by an underwriter strictly because of the cost of the appraisal and would be performed before a loss occurs.



This approach details the building components, with emphasis on other factors that affect the cost to rebuild such as location, terrain, height, etc. The quality of the components would also reflect the value of that component. This approach would normally take an appraiser between 10 – 20 hours to complete depending upon the complexity of the building. This is the approach commonly considered by an adjuster whereas after a loss the cost of the appraisal does not seem to become a consideration.

Building Code Upgrades


When a GRC or RCT appraisal is performed, code upgrades required at the time that the appraisal is performed are always included because current cost factors at that period in time are taken into consideration when the appraisal is completed.


When a LOSS appraisal is completed only the actual physical building components that were visible and damaged at the of the site survey are considered as part of the appraisal.



When a GRC or RCT appraisal is performed, bylaw requirements are not taken into consideration at the time the appraisal is performed. They can be added at the time in the form of a percentage of the appraised value or if the underwriter, broker, or insured knows what the bylaw requirements are they can be added individually.


Bylaws are not taken into consideration as part of a LOSS appraisal unless instructed by the adjuster to include them. If they are to be included the appraiser is instructed as to what to include or how to find out what to include by the adjuster.



The actual building age or the updated building age plays an important part in the appraisal process because over the year’s major changes had occurred to the building code in 1941, 1960, 1979, 1998, and now in 2012 which greatly affect the value of a building. Today GREEN TECHNOLOGIES are now part of the building code affecting everyone.



For example



DESIGN GROUP: Dwellings, Multiples, Motel
OCCUPANCY DESIGN: Multiple Residences (352)
EXTERIOR FINISH: Roof: Composite, Flat
Walls: Stucco
INTERIOR FINISH: Ceiling: Textured Drywall
Walls: Painted Walls
Floors: Carpet, Lino
Millwork: Painted Composite
PLUMBING: Standard Fixtures
HEATING: Electric Baseboards
ELECTRICAL: Standard Fixtures
STORIES: Number: 4
Height: 8 lineal feet per floor
AGE: 30 years
REGION: Western
CLIMATE: Moderate



  • Ceiling Height:
  • High Wind Areas:
  • Building Shape:
  • Weather Extremes:
  • Basement:
  • Congested Areas:
  • Building Height:
  • Resort Areas:
  • Building Size:
  • Remote Areas:
  • Hillside Location:
  • Current Cost Factor:
  • Shortages:
  • Location Factor:


This actually describes a common strata building in Vancouver and for simplicity sake let’s say the GRC or RCT Replacement Cost works out to be $1,000,000, while the ACV or Actual Cash Value is $560,000. Let us say this appraisal was completed in 2004.



Marshall and Swift provide multipliers for this purpose. These multipliers give a comparative cost value for the year it was built all the way up to today’s value so an appraiser can give you a value when it was new to a value for 1984 if you so desire. In this particular case the GRC or RCT Replacement Cost would be $228,990 when it was originally built.



The value in 2004 takes into consideration all code changes (remember there has been 2 major code changes since the building was built), and inflation to the tune of $771,000.

How would an appraiser determine blanket bylaw values?


Coupled with bylaws is code upgrades. Code upgrades would automatically be considered as requirements in order to provide the bylaw improvements required by the municipality. In this particular case knowing that there has been two major code changes, the appraiser would decrease the quality of construction each time so the average quality when constructed to fair quality for the 1998 code change, then to low quality for the 1979 code change. This would produce a difference of 36.5 % or $365,000 in the cost of construction to the whole building.


If no major code changes had occurred, then the appraiser would probably take a flat 5 – 15 % of the building value as a blanket bylaw value. This would be a judgment decision of the appraiser.


The cost to determine blanket bylaw values by an appraiser would be in the range of an additional 2.5 hours to 8 hours depending upon the complexity of the building.

How would an appraiser determine specific bylaw values?


The appraiser would have to attend the municipality in order to obtain a copy of the current bylaw requirements, revisit the site, determine which of the bylaws apply, then establish a value for each bylaw required.


The cost to determine specific bylaw values by an appraiser would be in the range of 1 to 4 days of extra work depending on the complexity of the building, location of the municipality, and the location of the risk.



Usually the code upgrade requirements only pertain to the actual damaged portion of the building but the bylaw coverage can affect the whole building.



$228,990 is the RCV value at time of construction.

$1,000,000 is the RCV value in 2004.

$771,000 is the inflationary value since the building was built of which

$365,000 accounts for the bylaw and code upgrade value

$406,000 would account for the increased cost of construction


For example, if 25 % of the building suffered fire damage, only that portion of the building that is being reconstructed would be subject to code upgrades in construction, while the entire building may be subject to bylaw upgrades depending upon the severity of the loss, the municipality it occurred in, and the amount of structural damage.


The reason we used 2004 as the year of this appraisal is because today in 2016, the Building Code change in 2012 introducing Green Construction 100% into the building code. Although publications and articles state that Green Construction will increase costs up to 7% for Commercial Buildings and up to 20% for Residential Buildings, it will depend upon when the building was built. Older buildings built of “like, kind and quality” with more natural materials with a fairly current building appraisal, already has this increase or more taken into consideration. That is if it is a true Insurance Appraisal and not a Real Estate or Market Appraisal update is completed. The 2004 appraisal does not reflect the Green Construction code changes and because of material obsolescence becoming almost immediate today coupled with applications practices, the Principle of Substitution will decrease the costs of rebuilding with like, kind and quality.



Generally speaking, in comparison to Real Estate Appraisals that will range between $200.00 and $500.00, the average Insurance Appraisal will cost between $300.00 for a desk update appraisal to $4,000.00 for a full site visit. The average residential appraisal costs between $600.00 to $1,000.00 today for a home between 5,000 and 10,000 square feet of finished floor area located on the Lower Mainland.


If you are paying any less, then you are not achieving your desired results which could result in a GRC policy being underrated by the underwriter. All too often, when we are asked to compete a loss appraisal for a GRC policy, we find that an appraisal had been recently completed and it stated that it was an insurance appraisal when in fact it really was a market appraisal.


These fees would apply to custom built buildings, and not buildings that are tract type of construction where the buildings are built on speculation that they will be sold after they are built. Today most buildings are built for a pre-approved buyer.


Tract type construction which started in the late forties, carried on into the seventies died out in the eighties. These types of buildings could and would be appraised en mass using valuation systems by Boeckh or a program that is similar. These systems did not require an appraiser to value the building but a fairly accurate value could be reached by simply asking and filling out a pre-determined questionnaire by an insurance broker. The cost of these appraisals was relatively inexpensive.



Today in this modern age, technology should be making appraisals easier and more economical to perform, whereas it has the opposite effect. The building owner can now upgrade his existing property or construct a new building with a variety of features that would never have been considered in the construction of those building years ago. Today there is just too much variation and couple that with the ever changing bylaw requirements in municipalities every appraisal becomes an undertaking.


For the insurance broker, it becomes a challenge to serve his clients well, especially with underwriters now asking for more information regarding bylaws that result in an undertaking for the insured to deliver.