MAY 2021 VOLUME 26 • ISSUE 1
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Replacement Cost Versus Market Value — Are You Covered? written by RIKI MARKOWITZ When a home burns down or the pipes burst and floods the house with water, homeowners call their insurance company to collect money they’ll use to repair or rebuild. If the home is considered irreparably damaged, then owners can ask the insurance company to pay the replacement cost of the home. But, what if most people don’t understand their own home insurance policy? A 2019 survey by Insurance.com found exactly that.
sibility to be sure their clients — past and current — understand their home insurance policy and are fully covered in the event that the worst case scenario arrives on their doorstep.
One area that confuses about 48 percent of policy holders is the section that describes how much money customers are entitled to when their home is injured past the point of repair. And when homeowners confuse replacement costs with market value, they’re at higher risk of being under-insured at the worst possible time.
Insurance companies arrive at a homeowner’s replacement cost using the same technology used to arrive at other types of coverage amounts. It takes into account the current cost of things like building materials, age of the roof and structure, square footage, energy costs, labor, fees and even the depreciation value. The final coverage amount represents what the company estimates it will cost to rebuild or replace the home to as close to its pre-damaged
REALTYLINE spoke to a group of real estate professionals in Austin who believe it’s their respon-
The first thing to get out of the way is that replacement cost has nothing to do with the value of a house or what a buyer would pay for it. Put simply, it’s the amount it would cost a homeowner to rebuild the home back to its pre-damaged condition.
condition as possible. Also, where you live makes a big difference in determining building costs. In areas of the country where the market has been stagnant or depressed, insurance replacement values have gone up. So you can imagine that here in the Austin area, where sales and home values have never stopped growing, replacement values have also been increasing dramatically. But not a lot of homeowners are aware of this growth and even more are completely unprepared for the degree at which their coverage is possibly lacking. In 2020 and 2021 alone, thousands of homeowners in Texas have had to replace homes injured beyond repair by hail, fires, frozen pipes and flooding from rain. For many policyholders, it was only after
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