This blog was originally written by Joe Bickel on March 29, 2017. It has been updated by Alyssa Anderson on July 7, 2022.

Property values can be confusing, even to those in the insurance industry. Not a day that goes by that an insured does not question why the Replacement Cost of their property is so high. They then try to convince their insurance agent that there’s no way they could possibly sell their property at the high value of the replacement cost. They come to the conclusion that the insurance company needs to lower the replacement cost on their insurance policy because they feel that they are getting ripped off. But what’s actually happening here is that the insured doesn’t understand the difference between Market Value and Replacement Cost. Sometimes Replacement Value can easily be confused by homeowners with other “values” when referring to a property. You should know the difference between these three values; in particular: Market Value, Assessed Value and Replacement Cost of a property. Here is the difference between them, and it will explain why one is so much higher than the other two.

Market Value

This is the value of a property on the open market, i.e., the price paid for house or a commercial building. This fluctuates with supply and demand – especially with the current market being so volatile and tumultuous – and has no bearing on rebuilding a damaged structure.

Assessed Value

This is the value that your municipality puts on your property. It is one of the components that make up the formula that is used to generate your tax liability for your property. This value is generated by compiling data from the previous year’s sales within in the municipality and then applying it to the current tax year.

Replacement Cost

This value is generally the highest of all three values. As a property owner this is the most that your insurance carrier will pay to rebuild your structure. There are many reasons why this value is higher than the other two. Replacement cost encapsulates a number of variables that included but are not limited to, debris removal of the original structure, cost of materials, labor costs to rebuild the structure, local permitting fees, architectural drawings and blueprint fees, etc. All of these expenses are not contained in the Market Value nor the Assessed Value because there was no need to include them since the structure is intact.

An additional update

Replacement Coverage costs have gone up in recent years, along with the price of almost everything else on the face of the planet, due, in part, to the supply chain issues created by the pandemic. A shortage of materials and labor, as well as general inflation are also major factors when it comes to replacement costs. This is something to consider when insuring your property. Replacement Coverage is not something you should skip out on just because the price (of everything) has gone up.

It is important to remember that the only time Replacement Cost becomes a factor is when you have had a loss to your structure. You do not want to find yourself short on coverage and not be able to rebuild your structure to the specifications that you previously had. If you are unsure what limits you have on your home, call your insurance agent or stop by any FBinsure location for a free assessment of your existing Homeowners policy. Be sure to check out our social media pages for updates on more helpful blogs like this one.


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