In this blog, we will break down Replacement Cost vs Market Value: What Should You Know? When is the last time you have looked at your home insurance declaration page? Did you look at the Dwelling/Coverage A protection and think “this is more coverage than I need, my house isn’t worth that much”? You’re not alone. Many Kentucky homeowners are confused about their homeowners insurance policy limits. Let’s dive into the difference between Replacement Cost and Market Value and why understanding your insurance coverage matters to you as a homeowner.
Replacement Cost vs Market Value: Understanding Your Home Insurance Policy
Most home insurance policies in Kentucky cover the structure of your home on a Replacement Cost basis. This means depreciation is not subtracted in the event of a loss. There are exceptions to this rule specifically regarding roof coverage, but we will touch on that in a separate blog.
Market value is the estimated price your home could sell for on the open market, under normal market conditions. This is not the same price that a contractor would charge to rebuild your home in the event of a total loss.
Many homeowners in Kentucky will notice the Replacement Cost of the home actually exceeds the Market Value of their home. This is a common source of confusion for homeowners reviewing their insurance policy, so let’s look into what is going on with your dwelling coverage.
Why is Replacement Cost Higher Than Market Value?
Insurance companies use independent third party data to determine the replacement cost of your home. According to the National Association of Insurance Commissioners (NAIC), replacement cost coverage ensures you have enough protection to fully rebuild your home using materials of similar kind and quality.
When insurance companies calculate your dwelling coverage amount, this data factors in:
- Construction materials and unique structural details
- Quality of finishes and home improvements
- Total square footage of home including basement, built in garage, etc.
- Geographic location of home and local building costs
- Age of the home and building code requirements
- “One Off” costs such as engineering fees, debris removal, permits, and construction costs
Insurance companies must assume your home would need to be replaced on its own, with no other homes requiring repair. Although this might not be the case in the event of a large tornado or other natural disaster, it would most likely be the case in the event of a fire loss which is one of the most common causes of total losses. Because of this, contractors would not be able to purchase the material in bulk which is the case when developers build most homes. Without this bulk discount, the cost to rebuild your home increases significantly. Furthermore, the cost of labor is significantly higher in unique “one off” total losses which further increases the replacement cost estimate.
Depending on where you are in the United States, market value will frequently exceed replacement cost (think west coast). However, in Kentucky it is simply the opposite and insurance companies must set your dwelling coverage to the amount it would cost to rebuild your home, not what your home is “worth” on the real estate market.
The NAIC’s Consumer Guide to Home Insurance explains that your homeowners insurance coverage should equal the full replacement cost of your home, and that replacement cost and market value are not the same. The market value, which includes the price of your land, depends on the real estate market and other factors unrelated to reconstruction costs.
What Should Kentucky Homeowners Do About Their Insurance Coverage?
- Check your current home insurance declaration page to see what is listed for “Dwelling” or “Coverage A”
- Request a home insurance quote review from your current insurance agent to verify accuracy
- Ask your insurance agent to share their replacement cost calculator for your home to check for missing features and ensure general accuracy of your dwelling coverage
- Don’t focus on the “market value” of your home when evaluating your homeowners insurance policy. Instead focus on what it would cost to rebuild your home in the event of a total loss.
- Review your policy annually to ensure your insurance coverage keeps pace with rising construction costs and home improvements
- Consider whether you need additional coverage options beyond basic dwelling coverage
The Bottom Line
At Aspen Ridge Insurance, we pride ourselves on taking the time to get to know you. This knowledge allows us to better understand your situation and offer tailored advice to best suit your insurance needs. Click here to start a free, no obligation review of your homeowners insurance coverages.
In conclusion, the best time to verify your insurance coverage is before you need it. We are here to help to make sure you and your family are properly protected with the right home insurance policy. Reach out to us today for a free insurance quote!
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