Insurace Coverage vs Purchase Price

Market Value and Home Insurance Coverage are Different

Many people are surprised to find that the coverage amount on their insurance is different than the purchase price or loan amount of their home. This is because our job as agents is to cover the exact amount necessary to rebuild the structures if they were completely destroyed, and that amount can be very different than the “Market Value” of the property.

There are a variety of factors that affect purchase price, including with land size/view, neighboring property values, school districts, seller motivation, etc… The insurance companies don’t care about any of those things. All we care about is the cost to reconstruct the home as it currently stands.

What is Homeowners Insurance Replacement Cost?

Replacement Cost is the cost to replace damaged materials and property with materials of like kind and quality, without any deduction for deprection. 

It is the formal term most insurance professionals use to describe the coverage amount.  However, here at Mojo, we find that term to be a bit vague, so we use the term “Reconstruction Cost” instead. This is the amount of coverage you will see in the Dwelling section or Coverage A of your proposal.

Setting coverage strictly at the purchase price, instead of the Reconstruction Cost, might mean you won’t have enough coverage in the event of a loss, or you could even be paying MORE than you need to. Neither situation is optimal, so a good agent will run a “Reconstruction Cost Estimator” (aka RCE) to determine what a good coverage amount is. Here is a graphic that shows you what factors can affect the RCE:

What specs affect the Reconstruction Cost of a Home? (Photo courtesy: The Insurance Journal)

Example 1 – Large Purchase Price, with Smaller Home 

3,800 sq foot home built in 1912 that recently sold for $750,000

There is a small area in San Antonio called Alamo Heights, that is known for it’s affluent and wealthy residents. It is common to find a home that is 1,200 sq feet, built in the 1950’s, that could be reconstructed for $200,000 easily, but due to the prestige of the area, the home will likely sell for $300,000 – $400,000. In this case, we would still want to insure the home at $200,000. Once the home is re-built, no more checks are sent out, so it doesn’t make sense to over-insure.

BUT THIS IS LOWER THAN MY LOAN AMOUNT! WILL THIS STILL QUALIFY?!

95% of the time, yes. In almost all cases, the mortgage company will be ok with a lower coverage amount, as long we are still covering the Reconstruction Cost. As an agent, we usually just need to send them the RCE to verify that our policy is strong, and they will approve the quote. However, there are a few rare instances where the mortgage company will require coverage to be a certain amount, regardless of the RCE, but this does not happen very often.

Example 2 – Motivated Seller/Good Deal/Repossession

Sometimes, you can find a killer deal on certain homes. This could be due to a motivated seller or repossession; we often see great deals on new builds as well, because builders will use their bulk discounts when they construct a neighborhood, and those savings are passed on to the first buyer. In these cases, the purchase price can be far under the Reconstruction Cost, so we would want to insure more than what you purchased the home for.

Each company has a different method to determine the RC, which is why they all can come up with a different coverage amount, but they should all be similar. If you want to make sure you have the proper coverage, you should ask your agent for a copy of the RCE. Or, if you request a quote from us, we will be happy to provide the RCE at no additional charge.

We here at Mojo help can help you save time money on home insurance by shopping the entire market on your behalf. We currently serve all homes in Texas, so if you want us to look around for you, please Request a Quote and our team will be in touch with options shortly.