The differences between “market value” and “replacement cost” – and how they impact your home’s insured value

Spoiler alert: When you call us to review your Atlanta home insurance, the amount of coverage we will advise you to carry is most likely not going to equal the amount for which you bought your home.

Why is that?

To begin, we need to differentiate between two key terms: market value and replacement cost.

market value vs replacement cost Rocko BlogMarket Value

Simply put, market value is the amount at which a home would sell for today in its current condition.

A home’s market value can fluctuate and can be difficult to predict.  It is calculated based on your home’s location, internal and external characteristics, as well as supply and demand.  To give you an idea of the drastic market value increases for houses needing Atlanta homeowners insurance, there have been homes insured in our Townley Kenton client base that have gone up over 20% over a 2-year period.

Some factors that influence the market value are school district ratings, crime levels, and neighborhood popularity.

Replacement Cost

On the other hand, replacement cost is the amount it would cost to rebuild or replace your home with like kind/quality materials if it were completely destroyed.  You’ll also see it listed as “dwelling amount” or “Coverage A” in your Atlanta home insurance policy.  For this article’s purposes, we’ll refer to it as “replacement cost.”

It is based on the quality and cost of building materials, labor, and workmanship at the time of loss.  Components include floor structure, floor covering, plumbing, electrical, special finishes, etc.  A cost per square foot is determined based on current building costs and trends that are regularly updated.  Contractors, restoration specialists, and home builders throughout the United States constantly communicate with insurance appraisers and software providing these updated values.  However, it has been our experience that many companies are still severely undervaluing the replacement cost on home insurance policies.

Some of the factors that affect rebuilding cost include:

  • Fees for contractors, architects, interior designers, engineers, etc.
  • Costs for building materials such as lumber, windows/doors, roofing, copper piping and natural stone
  • Rebuilding “green” with ultra-efficient technology
  • Heating and electrical systems
  • Foundations and footings of the home
  • If applicable, custom features such as cabinetry, wall and floor finishes, lighting, built-in appliances and electronic systems
  • Debris removal
  • Building demand at the time of loss

Why knowing the difference matters

There is an obvious variance between market value and rebuilding cost.

The purpose of insurance is to make you whole again after you suffer a loss.  Since that is the case, what the insurance company owes you after a loss is not your home’s market value but rather the replacement or rebuilding cost.  This is because the market value includes factors that home insurance cannot – and therefore does not – cover.

So, it is imperative that your home be valued at its accurate replacement cost and NOT market value.

Most insurance companies require your home to be insured to at least 80% of its replacement cost.  If your home is not insured up to its full replacement cost at the time of a loss, you are at risk of not being paid enough to fully rebuild your home.

Chubb, one of our company partners, advises: “it’s crucial that you maintain sufficient coverage for your home to be rebuilt to the same quality level in the event of a major loss. Promptly report any remodeling projects, renovations, additions or upgrades that may increase the value of your home to your agent/broker.”

They bring up an often overlooked issue, please let your Atlanta insurance agent know when you’re renovating or making any additions/alterations to your home, and they will adjust the value of your home accordingly.  Failing to do so could end up leaving you “self-insuring” after a loss.

Another word to the wise is that you want to make sure that your home’s insured value is keeping up with rebuilding costs.  This is extremely important because coverage regularly needs to be adjusted upward to keep pace with increases in construction costs, such as materials and labor.  Most insurance policies include these incremental increases to the rebuilding cost each year at your renewal but pay attention to them to gauge if they are reasonable. The last think you want is to find out your home is underinsured AFTER a significant loss to your property!

The best case scenario is guaranteed/unlimited replacement cost on your home

The companies that you hear and see advertised 24/7 in the media do not all necessarily guarantee that they will pay whatever it costs to rebuild your home in the event of a loss.  Guaranteed/unlimited replacement cost means that even if the damage exceeds the limits on your policy, the insurance company will still fully replace or rebuild your property without deduction for depreciation.

Regrettably, there are insurance companies and agents out there that do not offer unlimited replacement cost coverage on homes or have drastically underinsured the value of homes, leaving customers without enough coverage at the time of a loss.

The recent California wildfire is a heart wrenching real-life example of this.  One California fire victim was led to believe that his home’s rebuilding cost was only $621,000, however, when the fire destroyed his home it was determined that the cost to rebuild was actually twice as much at $1.2 million.  Another homeowner had his property insured for $727,800 with an additional 50% replacement cost. Now he is discovering that his insurance company is valuing his home at minimum of $1.3 million to rebuild – and possibly even $1 million more than that!  Both homeowners have filed lawsuits along with many other victims of the wildfire to see if they can recoup what they believe they deserve to rebuild their homes.

We understand that many people feel this will never happen to them but have seen this scenario play out many times over the years.  We cannot emphasize the need to properly insure your home enough.  As any homeowner who has suffered an underinsured loss will tell you, it is an experience you will never want to go through again.

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