Why is my Home Dwelling Coverage Insured for more than the purchase price or market value of my Home?
A common question we get at Karen Ehlers Insurance Agency is why is my home dwelling coverage insured for more than the purchase price or market value of my home? Insurance companies do not base the dwelling value off your purchase price or current appraised value, as there are several factors that go into the replacement cost value on a home.
When building a home, most of the time there is not a structure on the property that you are having to demolish and haul away. With most new homes, you may have to clear trees from a lot, and then you are able to build your home. In the event of a total loss insurance companies calculate your dwelling value based on the tear down of the home, hauling off of all debris, cost to rebuild the home, and any associated engineering and permits.
Depending on if your home was built by a tract builder, custom builder, or a builder that had multiple homes being constructed at the same time, can also play a factor in the cost. Just like Sam’s and Costco, any time a builder can buy in bulk they are able to keep the costs down. In the event of a total loss to your home that builder will not be rebuilding all the homes, as more than likely your home may be the only one that suffered damages, therefore the builder may not get the bulk rate on building materials for one home being built.
An appraised value is based on the current condition, age, overall economy, etc. of your home vs most homeowners’ policies are based on replacement cost. Replacement cost is based on the total cost of labor, activities, and materials to put the structure back to the way it was before the damage. This would include costs related to activities that precede the actual build out of the home such as clearing and cleaning up the damage debris. Insurance companies do not calculate land cost as your land will remain in the event of a loss. So, before an insurance agent writes your homeowners insurance, they should ask you about the details of your home such as year built, square footage, how many baths, how many bedrooms, do you have a fireplace, what type of flooring do you have, do you have custom cabinets, do you have any crown molding, etc. Insurance companies require insurance agents to rebuild your home with a database inside the carriers' quoting system. Insurance carriers typically receive quarterly updates on reconstruction/labor costs and update them every quarter. However, adjustments to your reconstruction cost estimator are done each year by the insurance carrier. If an agent does not ask those details, there is no way for an agent to verify they have properly insured your home in the event of a loss.
The important thing to know is that you are insuring your home based on the cost it would take to rebuild the structure of your house, which is independent of the market price, your mortgage, or property values.
If you found value in this article, please feel free to like and share with your friends and family members.