You asked if the Connecticut Insurance Department or our neighboring states have guidelines or regulations on the use of replacement cost estimators by insurance companies issuing homeowners insurance policies.

SUMMARY

The Connecticut Insurance Department does not regulate insurance company use of replacement cost estimators, which insurers use to determine the cost of replacing a home if it were totally destroyed. We contacted the insurance departments of Massachusetts, New York, and Rhode Island. None of these states regulate insurers' use of replacement cost estimators.

DETERMINING REPLACEMENT COST

When a person purchases homeowners insurance, he or she must analyze the value of the home and the contents (personal property) within it before deciding on how much insurance is needed. In determining the value of a home, a person must calculate how much it will cost to replace it if it were totally destroyed.

Often an insurance agent helps determine the replacement cost. The agent approximates replacement cost using formulas that take into account certain building characteristics (e. g. , location, brick or wood frame construction, square footage, number of floors, number of rooms, amenities). Insurers generally use computerized cost estimator programs to calculate replacement cost. Such programs are available from independent commercial vendors who sell them to insurers and others interested in determining building costs. Because insurers may use different cost estimators or different formulas to determine a home's value, replacement cost estimates may vary by company.

ACTUAL CASH VALUE OR REPLACEMENT COST

Once a person knows the approximate worth of the home and its contents, he or she must decide whether to purchase coverage on an actual cash value or replacement cost basis. If the person purchases coverage on an actual cash value basis, the insurer determines any amount payable as a result of a covered loss by taking the current replacement cost and subtracting an amount for wear and tear (i. e. , depreciation). If the person instead purchases coverage on a replacement cost basis, the insurer pays the amount it would cost to replace a home or repair damage without deducting anything for depreciation, up to the maximum amount of insurance purchased. Replacement cost coverage is more expensive than actual cash value coverage.

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