Under which basis are buildings typically adjusted in a property insurance policy?

Buildings in property insurance policies are typically adjusted on a replacement value basis because this method takes into account the cost to replace the damaged or destroyed property with new materials of like kind and quality, without deducting for depreciation. This approach ensures that the policyholder can restore their property to its original condition, which aligns with the fundamental purpose of property insurance — to provide adequate financial protection and enable rebuilding after a loss.

This basis is particularly important in scenarios where building costs might increase or change due to market conditions, and it guarantees that the insured amount will reflect the current costs of construction and materials, rather than an outdated value or market price.

In contrast, cost basis would imply considering the original cost of the building rather than its current replacement value, while market price basis would evaluate what a buyer would pay for the building in its current state, often resulting in lower compensation than needed for full replacement. Liquidation value basis looks at the immediate resale value of the property in its damaged condition, which would not fully address the need for complete restoration after a loss.