Market Value vs. Replacement Cost

The most common answer from clients when discussing the amount to insure their home for is “Well, I bought it for _______”. Market value has little if anything to do with the amount to insure your home. It is an indication of value when buying and selling, but not an indication of the rebuilding cost of the home in the event of a loss. Insureds may be surprised to see that the rebuilding cost or replacement cost can often be higher than the market value.
Replacement cost is the cost needed to rebuild or repair your home to its original condition. Rebuilding is often more expensive than building new for several reasons:
o Demolition work is very expensive and adds to the total cost to rebuild the home.
o Building a single home is often more expensive for a builder than building multiple homes due to the higher labor costs and material costs than purchasing in bulk.
o Natural disasters with widespread damage promote increased building costs.
o Bringing a home up to current codes can be costly, especially older homes.
o Access to the site can be hindered in the wake of a natural disaster.
The most accurate way to determine the replacement cost of your home is to hire a local building professional to produce a detailed estimate for you. It is important to hire someone locally as building costs vary greatly in different areas.
If you would like to talk more about the difference in market value vs. replacement cost and how underinsuring your home can lead to costly penalties at the time of a loss, call our office today at 843-881-2229!
Kadi M Quinn, CISR