Why is my home insured for more than its market value? How can the insured value of the home be equal to or greater than the market value of the combined home and the land it sits on? Is that right and why? Are you confused by “replacement cost” vs. “market value”?
Market value is what someone is willing to pay for your home in today’s market which is influenced by factors such as demographics as well as other economic variables, such as location, design, age, condition interest rates, taxes etc. Market value does not reflect what it would cost to rebuild your home. Residential real estate prices have little impact on the insurance coverage you need.
The “insurance” replacement cost estimate has only a coincidental connection with “market value”. The insurance replacement cost anticipates actually replacing the structure with like kind and quality not similar kind and quality. Woodwork, floors, trim etc. would be duplicated with the same unique features in the current location.
“Building Ordinance” is a specific coverage addressing the increased cost to bring the damaged part of a structure up to the current building code and, if required by municipal requirement, the undamaged part of the structure. Further, Building Ordinance addresses the cost, should at the time of the loss it is determined that your home does not meet the current construction codes or zoning codes that you would face to make the property conform. Most homeowner policies have inadequate “building ordinance” limits and need to be adjusted.
Should your property be damaged by a catastrophic [aka CAT storm] storm the cost of labor and materials may double due to supply and demand. Some companies anticipate this potential in their estimates and will pay whatever that cost is even should it exceed the dwelling limit. This is called “guaranteed replacement”. In the event of a “total” loss, companies may demand that you replace or repair at that site to receive “replacement cost” coverage while others may give you the replacement cost in cash.
It is important to work with your agent so he can help you understand what replacement cost is and how your replacement cost is determined. Many homeowners are underinsured because they don’t understand how replacement cost is figured and what factors may influence those costs.