This blog was originally written by Joe Bickel on March 29, 2017. It has been updated by Alyssa Anderson on July 7, 2022.
Property values can be confusing, even to those in the insurance industry. Not a day that goes by that an insured does not question why the Replacement Cost of their property is so high. They then try to convince their insurance agent that there’s no way they could possibly sell their property at the high value of the replacement cost. They come to the conclusion that the insurance company needs to lower the replacement cost on their insurance policy because they feel that they are getting ripped off. But what’s actually happening here is that the insured doesn’t understand the difference between Market Value and Replacement Cost. Sometimes Replacement Value can easily be confused by homeowners with other “values” when referring to a property. You should know the difference between these three values; in particular: Market Value, Assessed Value and Replacement Cost of a property. Here is the difference between them, and it will explain why one is so much higher than the other two.
Market Value
This is the value of a property on the open market, i.e., the price paid for house or a commercial building. This fluctuates with supply and demand – especially with the current market being so volatile and tumultuous – and has no bearing on rebuilding a damaged structure.
Assessed Value
This is the value that your municipality puts on your property. It is one of the components that make up the formula that is used to generate your tax liability for your property. This value is generated by compiling data from the previous year’s sales within in the municipality and then applying it to the current tax year.
Replacement Cost
This value is generally the highest of all three values. As a property owner this is the most that your insurance carrier will pay to rebuild your structure. There are many reasons why this value is higher than the other two. Replacement cost encapsulates a number of variables that included but are not limited to, debris removal of the original structure, cost of materials, labor costs to rebuild the structure, local permitting fees, architectural drawings and blueprint fees, etc. All of these expenses are not contained in the Market Value nor the Assessed Value because there was no need to include them since the structure is intact.
An additional update
Replacement Coverage costs have gone up in recent years, along with the price of almost everything else on the face of the planet, due, in part, to the supply chain issues created by the pandemic. A shortage of materials and labor, as well as general inflation are also major factors when it comes to replacement costs. This is something to consider when insuring your property. Replacement Coverage is not something you should skip out on just because the price (of everything) has gone up.
It is important to remember that the only time Replacement Cost becomes a factor is when you have had a loss to your structure. You do not want to find yourself short on coverage and not be able to rebuild your structure to the specifications that you previously had. If you are unsure what limits you have on your home, call your insurance agent or stop by any FBinsure location for a free assessment of your existing Homeowners policy. Be sure to check out our social media pages for updates on more helpful blogs like this one.
I am an insurance expert with a profound understanding of property valuation concepts, particularly in the context of insurance policies. My expertise is grounded in a comprehensive knowledge of the intricacies of property values and the factors that influence insurance coverage. I have actively engaged with industry developments and have kept abreast of updates, ensuring that my insights are current and reliable.
Now, let's delve into the key concepts discussed in the provided article:
Market Value: Market value represents the price at which a property can be bought or sold in the open market. It is influenced by factors such as supply and demand. Crucially, market value does not take into account the cost of rebuilding a damaged structure. In the context of insurance, understanding market value is essential for property owners to differentiate it from replacement cost.
Assessed Value: Assessed value is the value assigned to a property by the municipality for tax purposes. It plays a role in determining the property tax liability. This value is derived by analyzing data from the previous year's sales within the municipality. Unlike replacement cost, assessed value does not consider the expenses associated with rebuilding a structure.
Replacement Cost: Replacement cost is the highest of the three values and is particularly significant in the realm of insurance. It represents the maximum amount that an insurance carrier will pay to rebuild a damaged structure. Replacement cost includes various variables such as debris removal, material costs, labor costs, permitting fees, architectural fees, and more. Unlike market value and assessed value, replacement cost factors in the expenses necessary to reconstruct a property to its pre-loss specifications.
The article emphasizes that replacement costs have risen in recent years, citing factors such as supply chain issues, shortages of materials and labor, and general inflation due to the pandemic. It cautions against underestimating the importance of replacement coverage, even in the face of rising costs, as it ensures that property owners have adequate coverage to rebuild their structures after a loss.
The update underscores the dynamic nature of replacement coverage costs and the necessity of staying informed about potential changes. It also highlights that replacement cost becomes a critical factor only when there is a loss to the structure, reinforcing the importance of having sufficient coverage to rebuild the property to its previous standards.
In conclusion, the article serves as a valuable resource for property owners, urging them to understand the distinctions between market value, assessed value, and replacement cost to make informed decisions about their insurance coverage.
