Replacement cost vs. Market Value

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Replacement cost vs. Market Value

What would it take to rebuild your home if you suffered a total loss? Would you have enough coverage in place to rebuild the structure to the style & quality before the loss? People often express that the dwelling limit on their insurance policy is too high but there is a common misconception on dwelling coverage and what it is truly based on.

We frequently hear ‘but my house isn’t worth that’ or ‘I wouldn’t be able to sell it for that’. This is where the difference in replacement cost and market value are truly apparent. Replacement cost is a value of what it would take to completely rebuild, repair, or replace after suffering a total loss including debris removal. Market value is not assessing the property on its reconstruction cost. It is assessing the property on comps in the area, school districts, land and more. It does not take into account the specific of the property and certainly does not account for any upgrades within a residence.

Each carrier has their own methods for calculating what they consider to be a sufficient dwelling limit. You might be asking yourself what information do they use to calculate this limit? Most of the time agents pull information from the county tax assessors. This report provides the year built, square footage, number of stories, foundation type, number of bathrooms, deck and porch square footage, number of garage space etc.

It is also important for your agent to ask questions beyond the basics. What type of flooring do you have? Does the home have any upgrades, is the work custom? Do you have a wet bar, or a theater room? These are things that need to be accounted for.

It’s also a good idea to reevaluate the property and dwelling limit every 5 years. As day to day life happens, you might have forgotten to tell your agent that you updated your kitchen with custom cabinets and counter tops or that you have replaced all the carpet with hardwoods. This helps prevents gaps in coverage.

Your insurance policy is in place to provide adequate coverage to rebuild your home completely should you ever suffer a total loss. If you allow an agent to write the dwelling limit based on market value, you may not be able to rebuild your home as it was before the loss occurred.
Should you wish for one of our agents to complete a review of your home and current dwelling limit in place, please give us a call (770) 926-9444 or mli@mountainlakesinsurance.com.

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