Insuring Homes For Real Estate Value, Not Rebuilding Costs

Equating Insurance-to-Value with Market Value is a Common, Costly Mistake

December 22, 2011


Florida Press Office: (813) 480-6446,
New York Press Office: (212) 346-5500,

TAMPA, December 22, 2011 — In today’s stagnant real estate market, the cost to rebuild a home can greatly exceed its real estate value, and there is no correlation between real estate value and the amount of insurance needed. Market value is used to determine the selling price of the home, while rebuilding costs determine the amount of property insurance required for full protection and peace of mind. It is important for Floridians to know the difference to avoid having insufficient insurance coverage, according to the Insurance Information Institute (I.I.I.).

“Lowering your homeowners insurance to match your home’s real estate market value may seem like a way to save money, but it really puts the policyholder at financial risk,” said Lynne McChristian, Florida representative for the I.I.I. “Building costs fluctuate, as do the costs of raw materials used in construction, such as copper, lumber and concrete. In fact, the materials components for construction are up 3.8 percent in November 2011 compared with a year ago, according to the Bureau of Labor Statistics’ Producer Price Index. A far better cost-saving move would be to raise your deductible.”

The terminology insurers use when discussing rebuilding costs is insurance-to-value (ITV), which means that, in the event of a loss, the risk an insurance company assumes covers the full cost of rebuilding a home. Accurate valuation is important to both insurers and their policyholders because insurers charge premiums that assume properties are fully insured and policyholders will get the coverage they need if they experience a total loss.

Underinsured policyholders risk having high out-of-pocket expenses after a catastrophic event such as a house fire or hurricane. A disaster is traumatic enough without learning too late that you have a gap in your insurance protection. Insurers also require full insurance-to-value because they charge regulated, actuarially sound rates and affirm that the premiums are appropriate for fully insured properties.

Insurers must also follow Florida’s Valued Policy Law. The Valued Policy Law requires a property insurer to pay the face amount of an insurance policy when a total loss occurs, regardless of the actual value of the property at the time of the loss. The intent behind this state statute is to get the insured and the insurer to agree in advance on the value of the insured property to simplify the prompt settlement of a claim if a total loss should occur.

Many insurance companies offer a Guaranteed Replacement Cost policy. Some of these policies have a cap that limits coverage to 120 percent of your insurance policy’s coverage limit. For example, if you have $200,000 worth of coverage in your home and had a total loss, a Guaranteed Replacement Cost policy would pay up to $240,000 to cover rebuilding costs. This is important extra protection because the true cost of disaster can never be accurately known until after it happens.

“Property insurance is a replacement cost estimate, and the I.I.I. suggests you review this estimate annually with your insurance agent or company to be certain you are not under- or over-insured,” added McChristian.

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Insurance Information Institute, 4775 E. Fowler Avenue, Tampa, FL 33617, (813) 480-6446

Posted 4:20 pm