Download Insurable Value vs. Market Value

Insurable Value vs. Market Value - There Is a Difference
Your insurance company is looking at the cost to repair or replace your home, because that is what it
promises to do in the policy. Therefore, they require that you buy insurance for the replacement cost of
your home, not what you paid for it. Here’s an explanation of these important terms.
Replacement cost is usually defined in the homeowner’s policy as the cost to repair or replace the
damaged property with materials of like kind and quality, without any deduction for depreciation.
Replacement cost is what it would cost to reconstruct your home based on current construction costs,
special features, size, age of the home, etc. It is the actual cost of replacing the home—without deduction
for depreciation—using current standards and building codes that include fees associated with architects,
contractors, builders profit, etc. It does not include land value.
How do you calculate replacement cost? A simple way to get an estimate is to multiply the square footage
of your home by the current replacement cost per square foot in your area for similar homes. You can ask
a builder, a realtor or your insurance agent for guidance. You can also hire a licensed appraiser who will
give a more accurate number.
Market value is what a buyer will pay for the home and includes the cost of land. Market supply and
buyer demand then determines the final price. The market value could be more or less than the insurance
coverage on your home.
The homeowner’s policy contract typically agrees to pay to repair or replace your home should your home
be damaged by a covered peril. So when you are shopping around for home insurance, make sure that
you properly address the issue of home replacement coverage, regardless of the current market value of
your existing home.
Also consider….
Actual cash value (ACV) is typically calculated as the cost to repair or replace the damaged property,
minus depreciation. Homeowner’s policies may cover the structure at ACV if the home is older, however
replacement cost coverage is usually offered. However, many policies will cover your personal contents at
ACV, but you may be able to add an endorsement to change this to replacement cost coverage. In this
way, you will be paid the cost to replace an item at the current costs even if that item is older.
Ordinance or Law Coverage. Older structures that are damaged may need upgraded electrical; heating,
ventilating, and air-conditioning and plumbing units based on city codes. Many communities have a
building ordinance requiring that a building that has been damaged to a specified extent (typically 50
percent) must be demolished and rebuilt in accordance with current building codes rather than simply
repaired.
Replacement cost policies do not cover upgrades required by a town’s law or ordinance, loss of the
undamaged portion of the building, the cost of demolishing that undamaged portion of the building, or the
increased cost of rebuilding the entire structure in accordance with current building codes.
However, coverage for these loss exposures is widely available by endorsement. Standard homeowner’s
policies include a provision granting a limited amount of building ordinance coverage, and this amount
can be increased by endorsement.
If you have questions about coverage limits or any insurance question, please contact us.