It is common practice for insurance companies to cover homes for more than the market value. This frequently poses questions from homeowners “Why is my house being insured for more than it is worth?” Before deciding how much to cover a house for though, it must be determined how the insurance company will value the house if there is a claim. One system offered is to value the property at Replacement Cost, which as the name implies, is intended to pay to replace the property, without regard to the original or existing purchase price.
In most circumstances, the Replacement Cost option is going to result in a higher claim payment than if the property was covered at its present value. An insurance company is only required to pay up to the limit of insurance; therefore, the house will need to be insured for more than it is worth. In order to get Replacement Cost Coverage, the house will need to be insured for the amount it would cost to replace it.
Sometimes property depreciates in value. A television set would not be sold today for the same amount it was purchased for ten years ago; it would be sold for less, most likely much less than the original purchase price. A policy that includes a replacement cost provision would pay today’s cost of a new television set of like kind and quality which would be more than if the policy only covered the value of the ten-year old television set.
On a larger scale, the cost to rebuild or replace an entire home could be considerably more than the home was purchased for or could be currently sold for. Even for a home built this year, the cost to rebuild it very easily could differ from the original cost. There are some factors to consider when trying to measure the cost of replacing a home, such as:
No economies of scale
Cost of preparing the home to be rebuilt
Access to the home site may be limited or obstructed
Increase in labor costs due to high demand, as in the event of a disastrous event
Increase in material costs, probably due to shortages or discontinued
There are several methods used to approximate the replacement cost of a home. Some of the factors insurance companies use are:
Type of foundation
Attached or detached garages
Location of the home
Number of rooms and baths
Replacement Cost Coverage is an option every homeowner should consider. Obtaining this insurance will require the house be covered at the estimated Replacement Cost value, which usually is a higher amount than the market value. With the limit of insurance being higher, the premium will also be higher. Undoubtedly, no one wants to pay more for insurance, but the difference in a claim payment could be several thousands of dollars.
For more information give Triest Agency a call at 843-556-6232.