Dwelling Value vs. Market Value: What Are You Insuring?

With home values significantly reduced for the past few years, I have grown accustomed to phone calls from customers insisting that the dwelling value listed on their insurance policy is way too high. They typically say, “I could never sell my house for that much.” With spring in full swing and home buyers out scouring real estate listings again, it might be a good time to explain what home buyers are actually insuring.

An insurance company is never going to sell your home, just rebuild it. Therefore, your insurance carrier must insure the home for the amount of money it would cost to rebuild your home, not what the real estate market estimates as its worth. Market values and contracting costs differ greatly. At this point in time contracting costs exceed market values, which is part of the reason you are not seeing new homes built as often as in years prior.

Contracting costs include labor, materials, and contractor’s overhead, among other things. I hear people grumble about this as well, stating that it would never cost as much to rebuild their home as they are insuring it for. Insurance coverage is based on the replacement cost of your dwelling, not what it will sell for. Insuring your home for less means you may not get all the upgrades you currently enjoy, such as granite counter tops, maple or cherry cabinets, hardwood floors, etc.  Debris removal is another piece of the dwelling value puzzle that people often overlook. Most policies include coverage to remove the charred remains of your home after a fire. The cost of debris removal is significant. Local ordinance may also require the undamaged portion of your home be removed if it sustains significant damage.  Each town ordinance requires demolition when a certain percentage of damage is reached, usually 60% or more.  In cases like this, your dwelling value is not only covering the rebuilding of your home, it is also covering the demolition of the undamaged portion of your home as well as the cost of hauling that debris out so that your new home can be constructed.

As you can see, there is more to insuring your home than you would think. Most carriers use inflation guard to keep dwelling values in line with rising contracting costs. This is a yearly coverage increase by a certain percentage, and over time can throw your dwelling value out of whack. It is best to reassess your dwelling value with your agent every 3 to 5 years to ensure your home’s replacement cost keeps in line with rebuilding costs. Do you have any examples of how your dwelling value affected a loss you had? If so, please leave a comment.

31 Comments on “Dwelling Value vs. Market Value: What Are You Insuring?

  1. What is the definition of “other structures”? My policy states a 10% of dwelling amount (16,000 of 160,000). I do not have other structures.

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    • Other Structures provides coverage for any structure on your property that is not attached to the home itself (i.e. shed, gazebo, detached garage, etc). If you do not have other structures on your property do not worry, this coverage is provided automatically and is free of charge.

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    • Hi Dennis,
      Other structures refers to any structure on your property that is not attached to the main home (e.g. shed, gazebo, etc). This coverage is automatically included in your policy at no extra cost.

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    • What you do is contact a builder. Tell them your house burnt to the slab. Ask them for a ballpark estimate of what it would cost to bulldoze the remains off the slab and haul it out and build a new stick house. That’s the actual replacement cost. Don’t forget the Personal Property which is about half the dwelling. So for the guy (Alex) with the $150K house insured for $280K, he probably has another $140 in Personal Property making a total of $420K. I know what your thinking, just get out of the house before the fire and enjoy your new $400,000 home!

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  2. I paid 90k for my house. I have dwelling coverage of 280k. Newly constructed houses that are similar to my house are selling for 150k. I think I’m way over covered and paying too much for insurance. And this is only for fire and broad coverage.

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    • Hello Alex,
      You should see when the last time you went through a Replacement Cost Estiamtor with your insurance comany/agent. If it has been 5 years or more, it is definitely time to revisit that. This helps determine how much it would cost a contractor to rebuild your home based on the materials used in your home.
      Dwelling values typically increase every year by a percentange to try and keep in line with building rates and lumber rates. This is called inflation guard. After a while, it can get out of whack, so it is best to redo the Replacement Cost Estimator form every 3-5 years.

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      • My insurance agent didn’t care and told me I was lucky my rates went down this year. I shopped around and got coverage through Allstate for 160k, still high…but not as high as the 280k coverage I had. We’ll see how long it takes to creep back up.

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      • Hi Alex,

        I am sorry to hear that your agent said that to you. I hope Allstate has an accurate dwelling limit for you, and if so I am glad to see you got what you were looking for.

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  3. To tell the truth this became an excellent indepth post nevertheless as with every wonderful authors there are some details that might be worked upon. Nevertheless never the actual much less it turned out intriguing

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  4. This is a major loophole in the insurance industry. As one of the earlier posts indicated – my home dwelling value is also listed at about 50% higher than what new homes in this area of similar size are going for – and these even have all of the “upgrades” such as granite countertops, tile floors, hardwood floors, etc. My home does not. Given it is sponsored by insurance companies, the home dwelling calculator has significant “conflict of interests” written all over it because of course the insurance companies are going to want to inflate the value of your home to achieve a higher premium! My argument is if I am willing to live with the risk of a lower home dwelling value, so long as it is covering my mortgage balance, then that should be my decision. It should be more like car insurance in this case. If I want to insure my home for 50% or even 100% more than its true value, then it is on me to foot the incremental bill. My agent could not answer what inputs go into the home dwelling calculator that are refrective of my zip code, which leaves me to believe it is not well representative of my particular geography and could be inflated by home values that are not reflective of where I live.

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    • Hello Jay,

      I understand your frustration regarding dwelling values. Replacement values are determined based on averages, so you may have a situation arise where the cost of your home to be rebuilt does not match up with the dwelling value on the policy. Be aware that market value does not play a role in insurance, so what your neighbor bought the house for has no bearing on what it is to be insured for. Did the contractor take a hit to rid himself of the property? We don’t know this, but it goes to show that there are other things to consider beyond someone’s new home purchase price. I have seen homes that, despite the policy holder’s insistence of being over-insured, were underinsured after a total loss fire. I would like to see replacement values more standardized to help with this issue because many people feel as you do. Unfortunately, that is not the case and so we must use the tools provided to us to ensure your home value is accurate.

      Some states may allow homeowners to insure their property for the mortgage amount. Check with your agent or carrier to see if that is possible in your state. I would strongly advise against this, because you may find yourself with no mortgage but also with no home if a fire were to consume your property. The values are typically calculated based on cost of materials, contractor costs, lumber rates, etc. It may not be reflective of your particular zip code but rather the averages for the general area of the state you live in. I cannot confirm this is the case, but your agent may be able to contact your insurance carrier to see if there is a way to find out for you.

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  5. I’m also perplexed at the fact that my 15 year old house structure has coverage for $464K when the builder is still selling the same homes nearby for $230K (including the land!).

    I don’t know what it would cost to have the damaged home removed before replacing it, but I am sure my builder could rebuild it for A LOT less than $464K or even $230K.

    And I remember there was some kind of insurance company rebuilding valuation report two years ago. I don’t have it now, unfortunately. But it sure seems like something is wrong. If I can have this house built a block away for x dollars, why does it cost 2x dollars to rebuild it on my lot? (And I have no special upgrades, except for a colorful welcome mat).

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  6. Hi! I could have sworn I’ve been to this blog before but after
    browsing through some of the post I realized it’s new to me.
    Nonetheless, I’m definitely happy I found it and I’ll be bookmarking and checking back often!

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  7. Hi! Do you use Twitter? I’d like to follow you if that would be okay.

    I’m absolutely enjoying your blog and look forward to new updates.

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  8. My adjuster after my fire told me straight up his job is to pay me the least amount possible. Now I am told it’s a total loss. I am insured on my dwelling for $246k but told me they would only give me $175k to rebuild as I already have a well and septic and footing for the property. I don’t understand how my land falls into a dwelling coverage

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    • Thank you for reading our blog. I’m sorry for your loss and that you are unhappy with your claims service. I suggest speaking with your independent agent as they will know the details of your policy and will be able to help with your claim.

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  9. This discussion was a great source for me. I was looking at my policy and wondered why the dwelling coverage was going up so high each year and my property value is going down each year. Your comments have given me the answer and more. I have one question, could I get a few independent quotes to replace my home and challenge my dwelling coverage if the quotes are lower?

    Thank you and keep up the good work.

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  10. No one on this site mentioned the fact; your personal property is automatically calculated to be 75% of the dwelling amount. I purchased a small home for $92K (1,080 sq. ft.) and am forced to insure my home for $149K. In no way do I have personal property in the amount of $112. What a scam!

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    • Thank you for reading our blog, and we’re happy to know this article was of value to you! Some carriers offer a premium credit for coverages that are not needed. Please consult with your agent to understand what exposures you have and the coverage options available.”

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  11. Pingback: Market Value Vs Replacement Cost Home Insurance | My Home Insurance

  12. Property Insurance policy is for improvements to land, a structure (house/building) erected on owners land. It does not insure the land on which it is built or situated on.
    Insurance companies use property sales and county/parish property tax values as benchmark to set insured value, (interestingly the properly tax values set by these county/parish entities utilizes real estate and property insurance values to set tax values).
    County/parish property values are a combination of land value and house value!
    Insurance on property is coverage on the structure not the land!

    Example: County property value, Land $29.5k + House $198.5k = Property $228k.
    Property Insurance Should be on house only, therefore $198.5k!
    But insurance companies property valuation is further padded as they add 20%($46k) to $228k resulting in insured value of $274k! This is double dipping!
    Then add injury to insult they arbitrary say the contents of your home is 50 or 75% of the insured value!

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    • Thank you for reading our blog! We are happy to know this article was of value to you. Most insurance companies use Replacement Cost Estimates to determine the proper Insurance to Value of the home. The Replacement Cost Estimate does not include the value of the land; only the cost to replace your home in the event of a total loss. Some carriers offer special loss settlement options and premium credits for coverage that is not needed. Please consult with your agent to better understand what exposures you have and the coverage options available.

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  13. My loan officer said my insurance prem is too high and will disqualify for the FHA loan. I’m trying to understand how is it too high AND WHAT IS REQUIRED?….I have been with progressive for 10 years on my auto insurance in which is 75.00 a month with full coverage. they are willing to discount my auto insurance after being a value customer all those years and bundle the home insurance for 135.00 a month. So does this means I disqualify because I been with a company for 10 years and never missed a payment? what does my debt to income ratio have to do with my insurance? I’m trying to understand because its not like they are giving me a loan. What I’m understanding is that. My house is a 96,900 home and if something happen to it covers 209,000 because that is way it was explain to me. WHY WOULD I DISQUALIFY FOR A LOAN BECAUSE OF MY INSURANCE..IM GETTING MORE FOR LESS..

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    • Thank you for reading our blog and for your comment. We encourage you to share your question with your loan officer so he/she can further explain why you would disqualify for the FHA loan.

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  14. When u are selling your home and no longer are loving in it what kind of insurance policy should be added to homeowners

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    • Thank you for your comment! We encourage you to contact your independent insurance agent about your specific situation. Every insurance company is different in terms of how they handle this.

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  15. In the process of buying a house value $249,000. Builder is offering to insure the house for $147,000 dwelling x150% Extended replacement cost = $220,000
    $14,000 Separate Structures $88,200 Personal property full replacement $29,400 Loss of Use $300,000 Personal liability, 2,000 Medical payments . Do you think this the right amount coverage? x 150% extended replc. what does it mean? This is brand new house. Annual premium $ 319.00
    Thank you for your answer

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    • Thank you for your question! We encourage you to direct your questions to your builder, who is offering to insure your home. The builder has the specifics on your new home and should be able to answer the questions regarding their offer. Another good source would be your independent insurance agent. Your independent insurance agent may provide you another coverage option for your home during the construction phase.

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