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

With home values significantly reduced for the past few years, I have grown accustomed to phone calls from customers insisting that the dwelling value listed on their insurance policy is way too high. They typically say, “I could never sell my house for that much.” With spring in full swing and home buyers out scouring real estate listings again, it might be a good time to explain what home buyers are actually 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 hear people 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.

Brendan Mullen of B & D Construction says “Construction costs per square foot can range a great deal. You can use a basic number of $125 per square foot for new construction.  But, depending on taste, that number could get to $200 per square foot.  Those figures are for something like an addition or new home.  If you need to remodel or repair existing space, you can throw those numbers out the door. We all would like to save money, we want low insurance premiums.  To get them, the replacement costs need to be low.  If they are set too low, you will be lucky to even get back what you have now.  The message here is do not bite your nose off to spite your face.  While the chance of a significant loss is not likely, make sure you are protected in case it does happen to you.”

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 ensure your home’s replacement cost keeps in line with rebuilding costs