The Difference between Reconstruction Cost and Market/Appraised Value
In most cases, a home is the largest single asset a person owns. Protecting that asset with insurance is essential. Understanding the protections built into your insurance policy is paramount. A common assumption among homeowners is that a home only needs to be insured up to the amount of the mortgage, market value, or appraised value. Even though a mortgage company may require a certain percentage of a mortgage loan be covered, that doesn’t mean it is adequate coverage.
Replacement cost—not appraised value, not size of the mortgage, not real estate comps—is what matters to a homeowner after the purchase.
To determine a replacement cost, your insurance agent should use a Reconstruction Cost Estimator (RCE). An RCE is a calculation tool used to determine replacement cost to rebuild a home. This tool is loaded with up-to-date labor and materials costs. Agents enter specific attributes of a house, i.e. gas fireplace, wood-paneled library, Jacuzzi tub, etc. The value of these attributes are not limited to square feet, year built, attached and detached structures, etc. The cost of reconstructing a home as calculated by the RCE is the most accurate tool known used to determine the cost of replacing a home in the event of a total loss.
Other than the insurance carrier physically inspecting every single home it insures, the RCE is the best way to ensure proper coverage and cost efficiency. Without the proper replacement cost figured into your coverage, the risk of being underinsured looms as a threat. If you’re underinsured and if your home is destroyed, you would have to bear the burden of paying out-of-pocket expenses to replace your home.
Make sure you are working with a qualified agent who presents you a policy that cites replacement cost value before assuming your home insurance coverage is adequate.