Chubb Personal Insurance recently sent out a document that compared the replacement cost and the market value of a home and the importance of maintaining insurance to VALUE.
The document sets the scene by stating in March 2011, a homeowner was smoking a cigar, dropping the ashes into their garage garbage can, and later that night, the garbage can caught fire destroying the home. It states that back in 2007, Chubb appraised and wrote the home for $630,400, even though the market value of the house was well below this figure. To keep up with inflating construction costs, the coverage was adjusted upwards by 3.5% annually for the next three years resulting in coverage of $697,000. The document continues by stating the most recent-to-date Homes.com market value estimate on the same home was $402,000 and the most recent Trulia market value estimate was $499,950. This is a $200,000 to $300,000 difference from Chubbs’ appraised value. When rebuilding the home, the final building settlement ended up being $709,700. The homeowner was 98% covered with their coverage of $697,000 because they maintained insurance to value during a time of declining real estate values. The document concludes by saying, “the client was able to rebuild to code with like kind and quality materials, effectively ensuring total indemnification against the loss.”
What we take from this is that market value does not reflect the actual rebuilding/restoration costs to replace a home after a covered loss. Especially during times of declining market values, it is important to maintain your insurance to the insurable replacement value of your home and to keep up with rising construction costs. If the homeowner in this situation covered their home to a market value of $500,000, they would have been $209,000 in debt instead of only $12,000!
If you want to read the Chubb document, Click Here. If you have any questions about market value versus replacement value of a home, contact our office! 845-986-1177