One issue that consistently confuses homeowners, especially first-time buyers, is the difference between the market value of the home compared to its replacement cost.
The market value is what the home is worth on the open market. The insurance company is not concerned with market value; however, it is only interested in the replacement cost value of your home. It does not insure your land. The typical home can be rebuilt for using like kind and quality. The two are often not nearly the same.
What will the insurance company promise? The insurance company agrees to repair the home at replacement cost without depreciation as long as you have maintained the proper amount of coverage. Most companies will also offer endorsements onto the policy where the company will pay above the coverage limit as long as you have made a good faith attempt to insure your home to its replacement cost.
So what’s the issue? In many cases there is a wide discrepancy between the market value and the replacement cost. And, it can vary either way. At the peak of the housing market or in towns with hot markets you will see homes whose market value far out paces its replacement cost. Conversely, in down markets or towns with depressed markets you may find houses whose market value lags far behind its replacement cost.
For instance you might find a small, single-family home on a half-acre of land in South Portland go for $380,000 while the building could be rebuilt for $250,000 or less. On the other end you might find a large single-family in certain sections of Gorham going for $250,000 with a replacement cost closer to $400,000. The insurance company is interested in the replacement cost. The homeowner in South Portland can insure his house for $250,000 while the homeowner in Gorham would need to insure for $400,000.
Many home purchasers are told they must insure their homes to their outstanding mortgage amounts. This is not necessarily true. So make sure you ask your independent insurance agent when discussing replacement value for your home.