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How On Earth Did My Insurance Agent Get These Numbers?

The first time you see the value your insurance agent has placed on your home, you might cry a little. That’s because the number is probably nowhere near what you paid for your home, or what it is worth on the market. There is a good reason for this, and it can be a little confusing at first. Before your kids catch you crying, let’s take a look at how an insurance company values your home.

Reconstruction Cost Only

Your homeowner’s insurance covers the actual physical dwelling, along with everything that is in it. The purpose of homeowner’s insurance is to make sure that if the worst were to happen, your home would be restored to the same level as before the incident. So, if your home were to burn to the ground, homeowner’s insurance would pay to completely rebuild the structure and replace everything inside it. The value that is placed on your home is based on a complex system of differential equations, algorithms and complicated numerical analysis. These calculations are what’s used to determine what it would cost to rebuild your home from the ground up. The software that insurance agents use to estimate this number is called the Replacement Cost Estimate (RCE) and every insurance company requires the agent to complete the replacement cost when writing a policy. It calculates things like the price of building materials and the cost of labor.

Why Isn't Land Included?

Even if your house were to burn completely to the ground, you would still have your land (unless you’re Kevin Costner in Waterworld). You don’t lose that, nor do you lose the value of the land. In some cases, the land on which the home sits may more valuable than the structure itself, especially in high demand areas. When calculating the value of your home, your insurance company does not add in the cost of purchasing the land, because you don’t need to pay for that again. As such, land is not insurable.

What About Market Value?

Homeowner’s insurance isn’t really concerned with market value, because so much of it depends on the land, the location, the state of the real estate market, and whether or not you have crazy neighbors. All your insurance company is worried about is what it would cost to replace your home exactly as it was in that same spot. So, market value and reconstruction cost really have very little bearing on each other. The bottom line is, as long as your insurance company has the most accurate information about your home—square footage, building materials used, and all the important features—they can calculate an estimate for your home’s replacement cost, which can then be used to determine an appropriate amount of insurance.


If you have any questions about your replacement cost, please feel free to contact us.