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Replacement cost and market value can differ after a disaster
Insurance Business notes that homeowners often get confused when their dwelling coverage does not line up with either a home’s market value or what online tools show a property is worth after major disasters.
According to Adam Bakonis of Mercury Insurance, the disconnect is structural, because market value reflects what a buyer might pay based on real estate conditions, while replacement cost reflects what it would take to rebuild the physical structure after a covered loss.
Bakones said market value can be shaped by location, school districts, lot size, local supply and demand, interest rates, and proximity to jobs and amenities, while those factors do not drive the cost to rebuild the structure.
He added that replacement cost estimates rebuilding materials of similar kind and quality at current prices and does not include the land.