Finding the right homeowners insurance can be difficult, says CoreLogic contributor Susan Williams, and owners are often confused by their level of coverage for a newly purchased home. For example, if a client buys a home for $574,000, why is it only insured for $225,000?
In this example, the $574,000 is the market value, or the opinion of what someone is willing to pay for a home and the land that it sits on. Other factors come into play for the determining market value, such as a home’s view, school district, proximity to transportation, freeway or airport noise, crime rate and even intangibles such as the reputation or ambiance of the neighborhood. But these variables don't actually affect how much it would cost to rebuild the home in case of a loss, and the "reconstruction costs" are much different than the market value. Williams explains:
Homeowners insurance provides homeowners with a variety of coverage. The dwelling portion of a policy is intended to cover the expense to rebuild the home on the existing site should the homeowner suffer a loss that completely destroys the home. For this coverage, the policy uses a value called “reconstruction cost” (the $225,000 referenced above), which is the cost to reconstruct the home excluding its contents and the cost of the land. The contents of the home, such as clothes and furniture, are covered by a separate part of the policy.
So, how is the reconstruction cost calculated? Today’s software tools are more sophisticated and can virtually “build” a home from the ground up using local “real” labor and material costs, current building codes and fees and other unique characteristics of an individual home. These tools provide insurers and homeowners with more accurate and dependable reconstruction costs and, as a result, more accurate insurance coverage.