Reinstatement value
Reinstatement value is what it costs to build an equivalent building again today, to the same standard and with the same function. It is used as the basis for the sum insured on a building, and it is something quite different from market value: market value is what the property can be sold for and includes the site and the location, while reinstatement value covers only the building itself and the cost of putting it up again.
The difference matters in practice. A detached house in an attractive area can have a market value far above its reinstatement value because the site is expensive, while an older commercial building on a cheap site can have a reinstatement value that exceeds what the building is actually worth on the market. Insurance pays out on the reinstatement value because that is what covers the real loss in a fire or natural perils damage event: the site does not burn down, so it is the rebuilding of the structure that has to be covered. Compensation for natural perils damage is calculated precisely from the rebuilding cost, not the sale value.
Reinstatement value is set by a valuation or a calculation model based on building type, floor area (BTA), standard and building cost per square metre. It is adjusted regularly for price growth in construction. One central topic is under-insurance: if the sum insured is set lower than the actual reinstatement value, the insurer can reduce the payout proportionally when a loss occurs. The sum insured should therefore be updated after an extension, refurbishment or upgrade in standard, and it should not be confused with book value or tax assessment value.
For insurers, valuers and lenders, reinstatement value is a core figure in risk assessment. It is used to price building insurance, to judge how large a loss an incident can cause, and to check that the security behind a loan is in fact insured to its full value. For older or specialised buildings (heritage-listed buildings, infrastructure buildings), rebuilding with equivalent materials and methods can be considerably more expensive than a new building with modern solutions, and the sum insured has to allow for that.
From Placepoint's dictionary: Gjenoppføringsverdi
More information: Finans Norge, Norsk Naturskadepool
English: Reinstatement value (rebuilding cost).
Frequently asked questions
What is reinstatement value?
Reinstatement value is what it costs to build an equivalent building again today, to the same standard and with the same function. It is used as the basis for the sum insured and covers only the building itself, not the site.
What is the difference between reinstatement value and market value?
Market value is what the whole property can be sold for, including the site and the location. Reinstatement value is the cost of putting the building up again. The two can differ a great deal: a home on an expensive site has a higher market value, while an older building on a cheap site can have a higher reinstatement value.
Why does insurance pay out on the reinstatement value?
Because rebuilding the structure is the real loss in a fire or natural perils damage event. The site remains, so the insurance covers the cost of building it up again, not the sale value.
What is under-insurance?
Under-insurance arises when the sum insured is set lower than the actual reinstatement value. The insurer can then reduce the payout proportionally when a loss occurs. The sum insured should therefore be updated after an extension, refurbishment or upgrade in standard.