Posted by: Mary Lewis | April 6, 2012

Market Value vs. Replacement Cost


I’m frequently asked the question “Why is the insurance replacement value of my home so much higher than the market value of my home.” This is not a complicated answer, but frequently disputed by a homeowner.

Market value, the price at which your home may sell today, is not the same as replacement cost, which is defined as, the price to repair or rebuild your home if it’s severely damaged. When rebuilding a home, contractors must work with and match existing materials, which requires skilled labor that costs more. Plus, when a contractor rebuilds a single home, there are no economies of scale. The cost to rebuild is always higher than the initial cost to build. Market value includes factors such as the quality of local school system and popularity of the neighborhood and, therefore, is not a good indicator of the proper amount of insurance coverage for your home. The estimated cost for your home, however it is significantly more reliable indicator of the appropriate coverage limit needed in the event of a major loss.

Key factors that contribute to rising construction costs

-Varied spikes in building material costs throughout 2010-2011

-Fluctuating energy costs.

-Increased demand for imported raw materials and building products.

-Anticipated rise in inflation for 2011-2012.

-Additional overhead expenses (Workers compensation insurance, professional liability and green practices) incurred by contractors will be passed to the homeowner.

There’s a desire to save on premium by underestimating cost, which could leave you dangerously exposed. You can choose a higher deductible which can save you money. Consult with your agent at Chappell, Smith and Associates, on ways to save on your premium, don’t be left with inadequate insurance.

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