As insurance agents, we are often asked, “Why is my house insured for more than the market value?”
Typically your insurance policy is based on “replacement cost.” According to Business Dictionary, replacement cost is defined as the “current cost of replacing an existing asset or property with the same quality of construction and operational utility, without taking depreciation into account. Replacement cost is usually higher than the item’s book value.” In other words, the replacement cost of a home is the amount needed to repair the damage or rebuilt the home to its condition prior to the loss.
If you experience a covered loss, your insurance company will pay the “replacement cost” value of the damaged property (up to the coverage limits). Keep in mind the replacement cost does not include the value of the land – it is simply the cost of rebuilding your home.
The market value of a home is the price that a particular home, in its current condition, will sell within 30 to 90 days. There are three important pieces associated with determining the market value of a home: the particular home, current condition, and 30 to 90 days. Core Logic explains, “Market value is the estimated price at which your property would be sold on the open market between a willing buyer and a willing seller under all conditions for a fair sale.”
While there are many differences between replacement cost and market value, we hope this helps understand the main – and possibly most important – differences.
As always, do not hesitate to contact an agent at Cochrane & Porter for any of your insurance needs. 781-943-1555 or firstname.lastname@example.org