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Replacement Cost vs. Market Value: What’s the Difference?



If you were asked to describe the state of the housing market over the past few years, it could be summed up in one word: unpredictable.

At the start of the covid-19 pandemic, many experts predicted a looming housing crash. But instead of entering a real estate meltdown, U.S. home prices rose a staggering 37 percent in the two years between March 2020 and March 2022.

In fact, a recent study by Moody’s Analytics found that home prices are currently “overvalued” by nearly 25 percent. With this massive fluctuation in property values, you may be wondering about yours home owner insurance still provides the right level of protection.

The answer, of course, will depend on your specific homeowner̵

7;s policy. But there is one factor that can make a big difference in the event of a major claim — whether your home is insured for market value or replacement cost.

What is market value?

The market value of your home is based on what your house and land would sell for on the real estate market. It’s essentially an estimate of how much your home would be worth if you had to buy it from a realtor today.

A home’s market value is partly based on the size and condition of the house. But it’s also affected by a number of other factors — including your neighborhood, school district, and the overall real estate market in your area.

What is replacement cost?

A replacement cost homeowners policy means your home is insured with an estimate of what it would cost to repair or rebuild your home with materials of the same type and quality in the event of a total loss. Unlike the market value of your home, the replacement cost will not vary depending on where you live or what similar homes sell for. Instead, the replacement cost is calculated on factors such as the cost of building materials and construction contractors.

What is the difference between market value and replacement cost?

Here is an example to help you understand how these two types of insurance would work in the event of a claim.

Let’s say your home has a market value of $250,000. But at current rates of construction and materials, it would cost $300,000 to rebuild in the event of a total loss — like a fire or natural disaster.

If your home was insured at market value, you would be left with a coverage gap of $50,000. In this case, your options would be to build a smaller, less expensive home, or pay the difference yourself.

What is guaranteed replacement cost?

Whether the value of your homeowner’s insurance is calculated using market value or replacement cost, the amount your home is insured for will be listed as the limit on your policy.

But sometimes even the best estimates can fall short (eg when timber prices unexpectedly rose in 2021). That’s why ERIE offers Guaranteed replacement cost1 reporting. If your homeowner’s policy includes guaranteed replacement cost, ERIE will pay to rebuild your home with materials of similar type and quality without limiting it to the amount of coverage stated on the policy. This means that if there is a covered loss and the costs become high, ERIE will pay regardless of the difference.

It’s also worth noting that this coverage requires that any home improvement over $5,000 be reported to your agent within 90 days. So make sure to do it tell your agent about any new home improvement projects.

Get the protection you deserve

With guaranteed replacement cost from ERIE, you can rest easy knowing that your coverage will go a long way. Because unlike other types of homeowners who deduct for wear and tear or depreciation, ERIE pays the full cost of rebuilding your home to its former glory. Contact us today about guaranteed replacement cost coverage today – and get the peace of mind you deserve.

1Guaranteed replacement cost applies to the residence and requires home improvements over $5,000 to be reported within 90 days – not available with all policies and in all states. Coverage of costs to comply with laws or regulations is subject to limitations. Depreciation will be deducted until repair or replacement is made. Contact us today for more information.


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