Private Client Group | June Newsletter

Home Market Value vs. Replacement Cost Value

When most people consider the value of their home they focus on what the home would sell for in the current market and expect that their homeowner’s coverage should be for that amount. However, market value has little to do with the cost to replace or rebuild the home in the event of an insured loss. Market value depends upon the rise and fall of home prices in your area and non-economic considerations that make your home attractive to buyers—location, school district, local tax base, neighborhood crime statistics, and the availability of similar homes on the market.

Even though market value includes the value of your land, it can be less than the replacement cost value of your home. That is because replacement cost includes all the construction components necessary to repair or rebuild your home with like kind and quality of materials used in the original construction. Replacement cost may include a wide range of expenses including:

• Construction labor
• Materials of like kind and quality
• Demolition costs
• Architect and engineering fees
• Permits
• Interior designer fees
• Specialty interior finishes
• Designer name brand items

Historic and custom homes often have hand-crafted construction features, materials that are no longer in common use, and custom materials and designs. Theses factor can further impact the replacement cost of your home.

The cost to replace or repair a home is often more than the original cost. You may incur demolition costs before the rebuild can begin. You may also need to comply with current building codes. (For example, your home was unsprinklered, but building codes now require that the new home include a sprinkler system.) In addition, contractors lose their economies of scale (buying in bulk and scheduling subcontractors) when rebuilding a single home. The cost of energy efficient and green materials, commodity prices (gas to transport materials), and the cost to expedite the project (materials delivery and labor) also play a role in the replacement cost. And finally, in the event of a catastrophic event, supply and demand will have a huge impact on both the availability and cost of materials and labor.

Chubb Insurance recently addressed the issue of Market Value vs. Replacement Cost, and provided loss scenarios that illustrate the importance of insuring for replacement cost.* In the first example, a fire caused by overheated Christmas tree lights resulted in a total loss. At the time, Zillow’s estimated market value was $1.14 million to $1.64 million. Luckily, the home had been adequately insured for replacement cost and Chubb paid the full claim amount of $2,036,000. In the second scenario, a fire started in an air conditioning equipment room, spread to the attic, and caused such severe damage that the home was declared a total loss. The current market value per Zillow was $1,888,594. The home was insured for replacement cost of $3,321,760, nearly 25% more than the market value, and Chubb paid the claim for the full policy limit.

Parker, Smith & Feek and your insurance carrier can help you determine the replacement value based on the square footage, construction materials, and special features of your home. The insurance company may inspect your home to determine the replacement cost and document custom features. In addition, do not wait until renewal to report renovations and additions; let us know about them as they occur so that your policy limit can be increased accordingly.

*Copies of the Chubb Replacement Cost vs. Market Value Loss Scenario Case Studies are available upon request.