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Home Insurance: Reconstruction Cost vs. Market Value


We are regularly asked the question, “Why do I need to insure my home at such a high dollar amount when I only paid $X for it?” The purchase price of your home almost never matches up with what the reconstruction value of your home is. Depending on where you reside in the Country, the purchase price or market value of your home may be drastically less then the reconstruction value of your home. As a consumer, it is natural to want to insure your home for what you paid for it. In this blog, we are going to identify the reasons why it is critical to have your home insured for the correct valuation.

Here is the scenario we will use for each example: Client purchases their home for $300,000 and the estimated rebuild value is $540,000.

With the above scenario, it is glaringly obvious that in the event of a total loss, meaning the home is completely destroyed, there will not be enough coverage to reconstruct the property. Having the home insured at the full reconstruction limit will provide the appropriate amount of coverage for the homeowner to rebuild.

Using the same scenario, the client experiences a small cooking fire that destroys the entire kitchen. Every fire will generate a substantial amount of smoke. Smoke is incredibly invasive and it will travel throughout the home. Walls, floors, and ceilings will absorb the smoke. In addition to this, the smoke may get behind the walls causing further damage. Depending on the extent of the damage, restoration companies may have to remove the walls, ceilings, and floors throughout the home and essentially replace them with new materials. This is an incredibly expensive process that will most likely exhaust the limit of insurance. In that scenario, the homeowner would have to come out of pocket to cover the excess.

Many homeowners insurance policies also contain an insurance to value provision as well. This states that the home must be insured at the full reconstruction value or the homeowner can experience a penalty in the event of a loss or claim.

For these reasons, insuring your home for the full reconstruction value is imperative. We will work with you to understand the unique characteristics of your home to help determine the appropriate amount of coverage. In to this, we’ll work with you to review the endorsements that our insurance companies offer to provide additional levels of protection.

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