Over the past few years, home prices have fallen significantly from their peak in the mid-2000s.  So why haven’t home insurance premiums lowered also?  You would think declining property values would be matched with a similar decline in the cost of what you pay for insurance.  The fact is, the market value of your home is not the determiner for your amount of insurance coverage or what your pay in home insurance.

MARKET VALUE is the price you paid for your house, including the land.  Market value is based on several factors such as location, condition of the home, condition of neighboring properties, quality of school districts, scenic views, size of the lot, local market conditions, etc.

REPLACEMENT COST is the cost to actually rebuild your home.  Rebuilding a home is usually more expensive than building an equivalent new one.  Demolition and removal of the old home must occur before rebuilding even begins.  In general, rebuilding sites are less accessible than vacant lots for storing materials, therefore builders can’t buy at volume discounts.  Labor is harder to find and more expensive with reconstruction than with new.  Replacement costs include the materials, labor costs, site supervision, architect’s services, contractor’s profits and overhead, and possibly the foundation.  (Keep in mind newer building code changes may prohibit rebuilding on the current foundation or require other changes you may have to make that you had not planned on.)  Costs in historically designated areas can run approximately 15% more than normal due to strict historical preservation guidelines.  Sometimes materials are not available because they are rare or no longer manufactured; wood replacement may be difficult because of restrictions on rare or exotic trees.

For example: A 2500 square foot home purchased in a depressed city neighborhood may have a market value of $120,000.  An identical house located in a nice suburb may have a market value of $285,000.  However, the cost to rebuild the house after a loss would be the same, in the same general area, in either location.  The insuring company would be looking to insure both homes for the full replacement cost, or $275,000 in this example.  Remember, the replacement cost does not include the value of the land, just the cost to rebuild the entire house, as it is now, in the event of a total loss.

Insurance companies utilize cost estimators that use a formula to generate the correct replacement cost based on the details of your home.  When discussing these details with your agent, be sure to be as honest and accurate as possible.  After a claim occurs is not the time to find out your insurance is not adequate.