Replacement Cost vs. Market Value: Are You Covered?
Why understanding replacement cost is the key to determining if your home is properly insured.
For most consumers, the home is the largest lifetime investment they will make. It is often the backdrop of thousands of memories…birthdays, holidays, life changes, new babies, and more. Given the significance of this asset in the lives of homeowners and their families, it is incredibly important to properly protect it. Determining the correct coverage limit is critical when obtaining homeowners insurance. Unfortunately, it is among the most misunderstood aspects of personal insurance portfolios, leaving many unsuspecting homeowners underinsured and over-exposed.
According to reports from Marshall & Swift/Boekh (MSB), a leading provider of building cost data, up to a staggering two-thirds of Americans unknowingly underinsure their homes 1. Furthermore, 49.9% of US homeowners surveyed in 2020 incorrectly thought market value should determine the amount of coverage needed for their homeowner’s policy, rather than the replacement cost from an insurance perspective 2. So, if you are second-guessing whether your policy will respond the way you think it will, know that you are not alone, and we are here to help.
Market Value
Market value, as the name suggests and as you are likely more familiar with, is a home’s selling price. This figure is typically referenced when discussing real estate and the buying/selling process. Market value is a function of many variables, including supply and demand, current position in the economic cycle, proximity to good schools, local crime statistics, the home’s current condition, and the cost of land.
Replacement Cost
Replacement cost, on the other hand, is the amount of money in today’s dollars that it would take to rebuild your specific home. This figure is driven by the cost of materials and labor—specifically, materials of like kind and quality to the materials in the structure of your home (bricks, timber, concrete), and every room within your home (flooring, cabinetry, counter surfaces, and any custom finishes). Replacement cost also takes into consideration the supplementary expenses of building a home from start to finish after a partial or total loss. Supplementary expenses often include services like debris removal, engineering work to determine the viability of the remaining structure or land, permit acquisition, and expediting costs.
Consumers are often surprised to learn that replacement cost is often as much, if not more, than the market value.
Why it’s Important to Carry Full Replacement Cost
As your personal risk advisor, our goal is to protect the details and touches that make your house a home. Let’s say you experience water damage to your entire kitchen. Would you prefer to replace your damaged countertops with the same hand-picked, custom marble, or construction-grade formica? Would you prefer your hand-scraped wood floors to be replaced just as they were before, or would you settle for vinyl, manufactured wood floors? What about the hand-painted wallpaper, now properly soaked? Would you commission a new piece, or slap up some wallpaper from the department store?
Replacement coverage is highly recommended so that after a devastating loss, you may rebuild with the same je ne sais quoi features that you loved. And, some policies actually penalize you for not insuring the home at full replacement cost.
What Happens When the Replacement Cost Value Isn’t Enough?
Imagine a tornado whips through your neighborhood. A tree lands on your roof, causing multiple-story property damage. Unfortunately, during such a time, it’s likely that many other homes in your neighborhood will have similar, substantial damage.
In such a wide impact event, the rebuild costs can turn out to be much more expensive than anticipated due to supply and demand issues for both the necessary materials and services. Contractors, subcontractors, debris removal companies, and so forth, may all have “surge” pricing compared to their normal rates. This, in effect, could push the cost to rebuild your home well beyond the replacement cost determined in your policy.
A natural disaster is disruptive and devastating enough—do not add the stress of paying out-of-pocket to make your home whole again.
How Swingle Collins Can Help
Here at Swingle Collins, we appreciate the magnitude of this risk. We choose to work with partners that offer more robust replacement cost coverages than the average insurance program, such as Extended Replacement Cost or Guaranteed Replacement Cost. This provides an additional safety net if the amount of replacement cost in the policy is still not enough to cover the claim event.
Extended Replacement Cost provides up to an additional specified percentage above the replacement cost if the claim is greater than the coverage 3, while Guaranteed Replacement Cost ensures your home will be rebuilt under the policy regardless of the rebuild cost relative to the insured amount 4.
We are here to make sure that you have efficient and effective coverage and that your policy is built to respond how you want it to, should the need arise. Now that you understand the importance of insuring your home to the correct limit, we invite you to get in touch with a Swingle Collins Personal Risk Advisor to ensure you are up to date with your coverage.
The descriptions of coverages listed in this article are brief and subject to the provisions, limitations, and exclusions that can only be expressed in your policy and related endorsements. For additional information of how Swingle Collins & Associates can assist in meeting your coverage needs, please contact your dedicated risk manager. The information contained in this article is provided for informational and educational purposes only. It contains general information on insurance issues and may not reflect the most current developments in insurance coverage and is unlikely to apply in all factual scenarios. The information does not include all the terms, coverages, exclusions, limitations or conditions that may be contained in the actual insurance contract language. The policies themselves must be read for those details. Sample policy forms will be made available upon reasonable request. Thank you.
