When we are quoting home policies for our insureds, and we offer the quote we have worked up, the coverage A (the coverage on the home structure) is often met with a response of “I could never sell my house for that much!” or “I only paid $xxxx for my home, why do I have to insure it for the amount on the quote?”
We are going to explain the difference between Replacement Cost and Market Value; why they are different, why some companies require replacement cost, and some don’t and what this means to you as the insured and/or homeowner.
Is the price that someone would pay for your home within 30-90 days. The condition of your home, both inside and out, it’s location, and the current real estate Market are some of the items that will affect the Market Value of your home.
This is the amount of money it would cost to rebuild your home in the event of a total loss. This can vary based on the materials used and the cost of materials at a given time.
Insuring your home at Market Value could cause a gap in coverage. If you bought a home for $100,000 and only insured it for $100,000, but the cost to replace it was $180,000, in the event of a total loss you would have to come up with the $80,000 or build a smaller, less valuable home.
To determine the replacement cost of a home we gather specific information on your home such as:
- Year built
- Square footage
- Number of bathrooms (Full, Half, ¾)
- Type of siding
- Type of roofing
- Type of floor covering
- Type of wall coverings
- Dates of updates
- Pools, hot tubs, saunas, wet bars, or any specialty features
- Attached garages
- Porch and decks: size and material
- Type of heat
We then enter this information into our replacement cost program which looks at the information we entered and current cost of building materials to determine how much it would cost to rebuild a home of the same size and with the same materials.
Most companies want to see a home being insured for at least 80% of the replacement cost. If you want to insure your home for less, they charge you more for the coverage that you are carrying. Some companies require 100% of the replacement cost if you are adding their company specific endorsements to your policy. These endorsements may allow for additional coverage above the coverage A limit. This increase to coverage A can be up to 25% and is there to aid if there are any increases due to inflation and any property valuation estimates made by the insurer after a covered loss.
There are some companies that do allow for a Market Value policy, meaning, if you pay $40,000 for a home due to the market value of it but the cost to replace it would be $200,000 you could insure it for the $40,000 but that is all you would get in the event of a loss. They may also require an additional endorsement on the policy like a Repair Cost endorsement to be added. Repair Cost insures that you will not be penalized for a partial loss. For instance, if you were under insured and only had your home insured for $20,000 and you had a fire in your kitchen with damages totaling $10,000 you would not get the full $10,000 you may only get $8,000. The $2,000 you did not get is considered your “penalty” for being under insured. The Repair Cost endorsements means that they will pay the amount of the repairs, so you would get the full $10,000.
Whenever a renewal for a home policy comes into our office, we review it to make sure that the home is properly insured. We may do a new replacement cost estimator if needed and make sure you have all the discounts and credits that are available for you. We want to make sure that you are not over insured or under insured.
We are willing at any time to review your home coverage and policy for you; whether you are a current customer of ours or not. We like to take the time and make sure that there is an understanding of the policy and coverage you carry and answer any questions or concerns you may have.