May 04, 2018 @ 12:00am

One of the most used phrases we hear as an insurance agent is “my house is not worth that much!”

It can be very confusing: market value, actual cash value, assessed value, and replacement reconstruction cost and guaranteed replacement cost.  Which one is right? The answer is: it depends.

Market value is always changing.  It is what buyers and sellers agree to pay.  When there are a lot of people looking for a home in a particular area, the price of the home goes up. If the area is not in high demand, then the price stays steady or price goes down.

Actual cash value:  This is an insurance means of paying for a covered loss. When insurance on a property is written at less than the cost to replace, often 20% or more under the cost to replace, the settlement on a partial loss, (like hail damage to a roof and the roof has to be put back new), would be paid on an actual cash value basis.  Further, if the building is totally destroyed, an actual cash value policy will not pay enough to build back new.

An example of an actual cash value payment for a common kind of loss such as hail damage to a roof would be: a new roof is $20,000.  The life expectancy on the non-hail damaged roof is thirty years.  The age of the roof at time of insured loss is 15 years.  One half of the life remains, so one half of the cost of the new roof is paid less any deductible or $10,000.  If replacement insurance were in place on the roof, the payment would be $20,000 less any deductible.

Assessed value is determined by the locale in which you live. It is a value assigned for which the municipality / county / state will base its taxes. It is determined by inspection and to comparable homes / property in the area.  Assessed value is meant to be a comparable, one property to another so all are treated somewhat fairly.  It may or may not accurately reflect the market value.  Often the market value is changing up and down while the assessed value remains constant.

Replacement cost is determined by a calculation of the square footage of the dwelling and the features that are unique to it (bathrooms, decks, quality of construction, etc.) based on the location of the property.  This achieves the cost of which it would take to rebuild it back new with new materials.  Labor and material vary by location and construction costs are different from city to city as a result.

Reconstruction cost begins with replacement cost, but also takes into consideration the probability that there will be extra costs, for example if a home is destroyed by fire, it may cost $10,000 to $30,000 to remove the debris and prepare the construction site so that new construction can begin.  Fire damaged debris takes time to clear and is expensive to transport and even more expensive to process at an approved processing center or land fill.  Reconstruction also considers the fact that the timing of the loss is not convenient. In new construction there is a plan from which everything is coordinated.  In a reconstruction loss, it may not be a good time of year. Contractors may already be busy and have plans in place for work they intend to do.  Costs are simply higher as a result of added labor and some inefficiency.

Guaranteed Replacement cost:  You can see above from all the examples that putting the right amount of insurance on a building so that when a total loss, like tornado or fire, occurs that it is enough so the building can be put back new.  No one knows until a loss occurs and a contractor or contractors start putting their bids together what the cost is going to be.  Often, in a fire or tornado loss, they also have the issue of cleaning up the debris and sometimes it isn’t easy. Guaranteed Replacement cost removes the amount of coverage on the building from the policy and instead the policy states it guarantees to pay what it costs to replace at time of loss with brand new materials and the full cost of labor – whatever that amount might be.

So back to the question: market value, actual cash value, assessed value, replacement cost,  reconstruction cost and guaranteed replacement cost,  which one is right? The answer is: it depends on the question. If your question is, “How do I best protect the investment of my home?” then the correct answer is definitely guaranteed replacement cost as the company does just that, guarantees that it will pay whatever it takes to build back your home new, no excuses.


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