12700 NE 124th St #9, Kirkland, WA 98034
One of the most common questions we get during homeowners insurance review is:
What is the difference between home replacement cost and market value?
Here in the Greater Seattle area, we have one of the most sought-after real estate markets in the nation. Because of this competitive market, the market value of our homes can often be significantly higher than the cost to replace them.
Is the estimated cost including labor and material to rebuild a home back to its original condition prior to an insurance claim.
Is the market price of your property including both value of the land and value of any improvements on the land, such as your home, landscaping, or other features.
The biggest factor in determining homeowners insurance premium is the replacement cost of dwelling, which is the main structure of your home and all other structures attached to it. This coverage known as the dwelling coverage is one of the six main coverages of a homeowners insurance policy.
Dwelling coverage is also the main component that determines the coverage limits of other coverages, such as personal property and loss of use coverage.
Here is an example:
Our process starts with research on a home using these three main sources:
Through the local county website database, your insurance agent is able to identify some basic information such as the year built of your home and total square footage.
These are some of the main components used to estimate your home replacement cost.
Home listing services such as MLS can provide information such as type of flooring, roofing material, etc.
These information are helpful when your insurance agent is preparing for a homeowners insurance quote.
If this is a new purchase, your insurance agent may also reach out to the loan officer to obtain a copy of the residential appraisal report for the most updated information about your home.
After the initial research, we will reach out to the homeowner and confirm the accuracy of the information from these sources. During this conversation, we will also inquire if there has been upgrades or recent changes that were made to the home.
In the final step of the process, we will enter the data of the home into our internal system, and the system will provide the estimated replacement cost of the home.
Here is the list of the major rating factors that are used:
Each category may also have additional options to specify quality and build grade for individual components of the factors listed above.
For example with roofing materials, there are options to select shingle, metal, or tile. With flooring, there are options for different types of carpet, hardwood, slate, or ceramic tile etc.
Such as recently renovated cabinets and countertops in the kitchen or a converted garage from carport, they should all be included in the submission. The more details we are able to capture and input into the system, the more accurate the home replacement cost estimate will be.
It is important to have an accurate home replacement cost in order to determine adequate coverage for the homeowners insurance policy and be financially protected for the full value of the home.
In the situation where the estimated replacement cost seems lower than expected or if you simply wish to increase your coverage, there are a couple of options available:
For most insurance companies, you can choose to insure the dwelling coverage up to 150% of calculated home replacement cost.
Extended coverage is an endorsement on homeowners policy that extends dwelling coverage limits by 20%, 25%, or 40%.
How this endorsement is included on a policy varies by different insurance companies.
Some companies include this endorsement automatically at a fixed percentage, and provide options at higher premium for customers who may be looking for even higher percentage limits.
Other companies only offer a fixed percentage and do not have options for higher extended limits. In this scenario, you may only increase the total coverage limit by adjusting the dwelling coverage limit.
Replacement cost can fluctuate from time to time. The two main cost factors are:
Most major insurance companies design their homeowners policies to automatically include an inflation adjustment at every renewal. Beyond inflation, there could also be disruption in costs due to surge in demand as a result of major disasters that caused widespread damage to homes in an area.
This is also the reason why most homeowners insurance policies include the extended coverage to account for potential cost overruns.
Every insurance company has its own guidelines for policies. We always recommend talking to your insurance agent to discuss your personal policies in detail. Working with an insurance agent is the best way to make sure you are properly covered.