In the proposed Definitions of Values recently proposed by the Machinery and Technical Specialties branch of the ASA, no changes were made to the first 2 definitions:
- Reproduction Cost New is the cost of reproducing a new replica of a property on the basis of current prices with the same or closely similar materials.
- Replacement Cost New is the current cost of a similar new property having the nearest equivalent utility as the property being appraised.
Changes were made, however, to the definitions relating those two terms to the insurance industry. Here are the newly proposed definitions (bold & italic added):
12. & 13. Insurance The insurance industry has its own set of definitions, which are similar to those utilized in the appraisal industry. However, for insurance purposes, “replacement” and “reproduction” are synonymous. The cost new, per an insurance policy, may or may not incorporate exclusions. The appraiser must understand the requirements stated in the insurance policy and the needs of the insurance companies, underwriters, and brokers.
Cost new less depreciation, sometimes referred to as actual cash value, is an opinion of the current cost of reproduction or replacement, less accrued depreciation considered for insurance purposes, as defined in the insurance policy or other agreement.
While it’s clear that the proposed definitions and that of the current definitions (below) are addressing the same considerations in slightly different language, the new definitions are quite different than those currently in place (bold & italic added):
12. Insurance Replacement Cost is the replacement cost new as defined in the insurance policy less the cost new of the items specifically excluded in the policy, if any.
13. Insurable Value Depreciated is the Insurance Replacement Cost less occurred depreciation considered for insurance purposes.
The proposed change in the definitions regarding insurance appraisal remind appraisers not to take anything for granted. They clarify the need for good communication: Talk to the insurance company, read through the insurance policy of the Subject Asset being appraised, and always confirm and be certain of what kind of appraisal has been ordered. If depreciation is part of the policy, be sure verify an as-is date. Asking the right questions and working with the insurance company’s definitions will ensure reaching appropriate values for insurance appraisals.
