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How Does Homeowner's Insurance Value My Property?

The first time you see the value your homeowner’s insurance has placed on your home, it might shock you 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 very good reason for this, and it can be a little confusing at first. Before you panic, take a look at how an insurance company values your home.

Your homeowner’s insurance covers the cost to rebuild your home and replace 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 condition it was before the loss. The value that is placed on your home is based on a complicated system of calculations used to determine what it would cost to rebuild your home from the ground up after a catastrophe. This calculation is not the same as new construction cost. Reconstruction costs factor in the cost to demolish and remove the existing structure and supply and demand of labor and building materials after a catastrophic event. Often new construction contractors purchase materials in bulk at significantly lower prices than a contractor purchasing material for only one home. After a major event such as a hurricane, millions of homeowners may need to rebuild. Brevard County experienced this after the 2004-2005 storms. Licensed roofers with availability were hard to find and supplies were even more limited. Many times materials from other states had to be shipped in to complete the work.

What isn’t included in this amount is the value of your land. Even if your house were to be completely destroyed, you would still have your land. You don’t lose that, nor do you lose the value of the land. In many cases, the land on which the home sits is 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.

Homeowner’s insurance isn’t really concerned with market value, because so much of it is wrapped up in things like the land, the location, and the state of the real estate market. All your insurance company is worried about is what it would cost to recreate your home exactly as it was in that same spot. So, market value and reconstruction cost really have very little bearing on each other, except for the connection between pricey areas and the cost of building materials which can be correlated.

The bottom line is, as long as we have the most accurate information about your home—square footage, building materials used, and all the important features—we can calculate an appropriate amount of insurance coverage for you. If you have any questions, contact us and we would be happy to discuss your specific situation!