Home Insurance Market Vs Replacement

Apr 6, 2017

  1. tramsey76

    tramsey76 New Member

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    Hello all

    This issue has bugged for a few years and trying to "non company line" opinion.

    My home is a Boston suburb and I believe in it over insured . The policy is 50 % higher than the market value of the home. If you back the land cost of my home the insured value double the market value of the home. The answer I get from my agent is that I fell into the classic trap of confusing market with replacement value. My response is while I understand the difference, the two should be correlated and the gap should not be that great.

    The insurance company says that is true cost to rebuilt my house.

    I asked the agent if something bad happened to my home would they give me the full value of the policy.

    I appreciate any help people can give me on helping me understand this issue

  2. insurance1822

    insurance1822 Guru

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    understanding the difference between MV vs RC & suggesting the discrepancy in your situation "shouldn't be so great" are mutually exclusive. Unfortunately, we run into this a lot. Here's your answer..

    Replacement costs are automatically calculated by MSB replacement cost estimators that typically automatically pull from tax records. The year built, square footage, construction style, bedrooms, bathrooms etc are used to quickly derive the rebuild cost. The rebuild cost is the amount necessary in a worst case scenario to demolish your home, haul away the debris & rebuild from scratch exactly the way it was. You could experience a loss substantial enough that the home must be entirely demolished & rebuilt from scratch. Are you experienced w/ demolition costs? If that happens right around a huge natural disaster when building materials are in great demand, have you accounted for that increased cost? Have you accounted for the increased disposal cost of burnt building materials? Have you accounted for the fact it will be a local builder not buying in bulk or building a new development?

    Replacement cost also means the amount necessary to build it exactly the way it is currently. I'm not familiar w/ the suburbs of Boston, but if the home is solid brick or stone...it's expensive to rebuild that way. If it's an early 1900's style home w/ 10" oak base molding, wider stairways, decorative railings, solid 1" thick oak floors, 10ft ceilings, plaster etc...the costs add up.

    Only way around this is to ask for functional replacement cost. Then, you're agreeing to rebuild w/ the cheapest frame/siding available. When you're talking a total loss situation, you won't be written a check for the full rebuild cost (unless you have an Encompass Elite Plan.) You'll be forced to rebuild the home OR take a check for the ACV (replacement cost minus depreciation..) although technically that's subject to the terms, limitations & exclusions of your state's policies so I can't say for sure.

    If you have an independent agent, just save yourself the time & trust he knows what he's talking about. If you have a captive agent (allstate, state farm, nationwide, farmers..) then assume he's an idiot.
  3. InsCommentary

    InsCommentary Guru

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    Replacement cost can be significantly more or less than market value. There are homeowners policies that can be written on an ACV or market value basis (e.g., the ISO HO-8), BUT coverage is VERY restrictive with few options to enhance coverage.
  4. Herkster

    Herkster Guru

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    Try living in a location where the market value of your house can be $30k, and replacement cost is $150k. We run into this all the time when quoting new business that is with other carriers. They have it insured at market value, which leaves the insured open to large co-insurance penalties if they have a loss. However, regardless of how we explain what they are risking (I mean, really, what is $30k going to do for you if your house burns down? Not ****), but they don't want to pay the increased premium to be insured correct. And, I sure as hell don't want to risk the E & O claim of insuring them that way.
    Herkster, Apr 11, 2017
  5. marindependent

    marindependent Guru

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    tramsey76 - it is a a very market specific thing. My opinion is that most consumer and some agents have absolutely no idea what it costs to fully raze, recycle, draw, approve, permit, and rebuild a home. It is very possible that you are in the construction industry and have a good idea what new buildings cost.

    However, as has previously been suggested the principal of demand surge could send your total rebuild cost to the moon and back.

    If you are truly dissatisfied with your agent, try another, perhaps an independent agent.

    Or perhaps consider an insurance company that will guarantee the rebuild of the home, with no dollar limits.
  6. adjusterjack

    adjusterjack Guru

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    Actually, the gap can certainly be that great. I'll give you an example.

    Take 3 homes, identical in construction, quality, size, features, etc.

    In California the market value is $2,000,000. In Arizona the market value is $500,000. In Alabama the market value is $200,000 (No offense Alabama).

    The cost to rebuild is $350,000 or so, maybe there are minor variations of the cost of labor and materials.

    But that's why construction cost is critical in determining the amount of insurance to carry on your home.

    I don't know why your Replacement Cost is twice the market value. Maybe you live in a slum with a depressed real estate market. Maybe something else. There's just not enough information.

    Try this home replacement cost estimator and see how close you get to your insurance value:

    Building-Cost.net - Start Your Valuation
  7. fed up

    fed up Guru

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    Why do you constantly drag up old links and conversations to start a new post? Especially when your statement is not entirely true? Most denials of Claims come from gaps in a policy due to a customer dropping coverage, trying to bind their own coverage, or not understanding the language of the policy. Should a company pay the claim right away and then find out there was no coverage
    fed up, Aug 9, 2019