Why is my home insured for more than its market value?

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Any given day we get questions regarding the replacement cost of one’s home. This is also known as the dwelling limit on a homeowners policy. Because of this we decided to write up a quick blog to discuss why this happens.

The biggest factor behind the confusion is that real estate values do not translate into insurance replacement costs.

Since the peak in 2007 home values have gone down and inverse to that are the costs of construction. This has been consistent over the last few years – some of the data below shows this relationship:

  • 2008: Home values dropped 11%
    • FHFA reports cost to repair increased 5.8%
  • 2009: Chartis Insurance reported sale values flat to down
    • Building costs up 1%

Another question we field often is: “I know what the builder built it for, why is my insurance company telling me it’s more than that?”

The answer to this is because the insurance company would not be working with the same factors as a new build. For example:

  • If there is a partial or complete loss, the debris will have to be hauled away and there may be demolition needed.
    • This coverage is included in most homeowners dwelling coverage
  • If there is a catastrophic loss caused by a hurricane or tornado the supply and demand of construction companies and contractors will follow the basic economics of the situation
    • = Costs will go up


These are just a few snapshots to help with the basic understanding of insurance vs. real estate values.

If anything you read was interesting and may have spurred a question – please ask! Post a message on the board or email info@delandgibson.com

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