Replacement Cost Insurance Explained

[Cameron Moore]

Many times I have to address the difference between Replacement Cost and Market Value to my clients. Unfortunately, there is a disconnect between Mortgage Underwriters and the actual distinction between the two. 

The main difference is that Market Value includes the land and Insurance does not. That alone causes a $60-$100k difference in the Loan value and the actual coverage that you should carry on your house. The market is also much more volatile than the material cost to rebuild a property from the ground up after a loss. 

On top of that, unlike liability coverage, you can actually be OVER-INSURED. We call it Phantom coverage because if the replacement cost of your property comes back at $250k, but you want the market value covered at $375k then not only are you ~usually~ paying a higher deductible but you actually don't see a dime over the amount it costs to rebuild. You have wasted your premium over the life of the policy. 

There is inflation protection and an endorsement to add 25-50% of additional replacement cost in order to protect you from unexpected inflation (like that of lumber in the last 2 years) but it hardly effects premium and does not effect the deductibles. Trust your Insurance broker!