Dwelling Value vs. Market Value: What Are You Insuring?

An insurance company is never going to sell your home, just rebuild it. Therefore, your insurance carrier must insure the home for the amount of money it would cost to rebuild your home, not what the real estate market estimates as its worth. Market values and contracting costs differ greatly. At this point in time contracting costs exceed market values, which is part of the reason you are not seeing new homes built as often as in years prior.

Contracting costs include labor, materials, and contractor’s overhead, among other things. I hearpeople grumble about this as well, stating that it would never cost as much to rebuild their home as they are insuring it for. Insurance coverage is based on the replacement cost of your dwelling, not what it will sell for. Insuring your home for less means you may not get all the upgrades you currently enjoy, such as granite counter tops, maple or cherry cabinets, hardwood floors,

etc. Debris removal is another piece of the dwelling value puzzle that people often overlook. Most policies include coverage to remove the charred remains of your home after a fire. The cost of debris removal is significant. Local ordinance may also require the undamaged portion of your home be removed if it sustains significant damage. Each town ordinance requires demolition when a certain percentage of damage is reached, usually 60% or more. In cases like this, your dwelling value is not only covering the rebuilding of your home, it is also covering the demolition of the undamaged portion of your home as well as the cost of hauling that debris out so that your new home can be constructed.

As you can see, there is more to insuring your home than you would think. Most carriers use inflation guard to keep dwelling values in line with rising contracting costs. This is a yearly coverage increase by a certain percentage, and over time can throw your dwelling value out of whack. It is best to reassess your dwelling value with your agent every 3 to 5 years to ensureyour home’s replacement cost keeps in line with rebuilding costs.


Courtesy of:  Matt Barger, Allen Tate Insurance




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