Why Is My Home Insured for More Than I Could Sell It For?

While the market value of your home is commonly based on tax assessment records, real estate appraisals or the recent selling prices of similar homes in your neighborhood, your homeowners insurance limit is based on what it would cost to replace your home if it was completely destroyed. This is frequently a different figure from what your home could fetch on the open market.

Erie Insurance uses a program called Home Cost Estimator to determine how much it would cost to rebuild a house from the ground up. “The estimator uses information about a dwelling’s characteristics to determine the estimated replacement cost,” says Terry McConnell,vice president, Personal Lines Underwriting, at Erie Insurance. “The information is pulled from several sources to come up with a very close approximation of what it would cost to reconstruct a house.”

Factors affecting a home’s reconstruction value

Many different factors affect how much it would cost to reconstruct a home. Some of the main ones include:

• The home’s square footage
• The materials used in the interior and exterior construction
• The style of the house
• Any special or custom-built features like fireplaces or exterior trim
• Any improvements or additions made to the home
• The local construction costs

It’s common for a house to have a significantly higher homeowners insurance limit when it’s an older home.

“Original building materials common to older homes like plaster, hardwood floors, full-dimensional lumber and trim make the replacement cost of older homes higher than a modern home of the same size and style,” says McConnell.

A better way to insure your home

When insuring your home, the value should be equal to the amount it would cost to replace the home. You’ll also want to make sure your home is covered on a replacement cost basis rather than an actual cash value basis.

Actual cash value coverage makes a deduction from the settlement based on depreciation. Meanwhile, replacement cost coverage pays the actual cost of replacing your home with materials of like kind and quality without a deduction for depreciation.

To illustrate, imagine you paid $10,000 for a new roof. It depreciates $1,000 every year. If your roof was destroyed by a fire in Year Four, you would only get $6,000 to replace it under an actual cash value settlement. A replacement cost settlement would replace the damaged portion of the roof without a deduction for depreciation.

Many ERIE homeowners policies automatically insure homes on a replacement cost basis. An Erie Insurance agent can tell you more about replacement cost and how your homeowners insurance works.