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Why does my home's insurance coverage differ from its value?

Q. My home is worth one amount, but my insurance coverage is for another amount. Why is there a difference?

A. This is a great question that comes up consistently from customers who own homes. The assessor says your home is worth one amount, the realtor helping you sell the home says it's worth another, and your insurance policy has it covered for yet another. Shouldn't we all be on the same page?

When different sources provide inconsistent values, it can give the impression that someone might have it wrong. In reality these numbers will almost always differ in some way, and I'd like to help you understand why.

The most important thing to know is that these figures don't measure the same thing. A home's assessed value is the municipality's measure of the value of both the home and land, for tax purposes. The assessor needs to know how much everything is worth to accurately calculate your property-tax bill.

If you buy a home, a lender may request an appraisal to determine its market value. The seller already has determined a selling price, and the bank wants to be sure that amount is appropriate before lending you money. Banks use appraisals to determine that.

Your insurance policy, however, often reflects a different figure from either an assessed or appraised value. That's because we're insuring your home for its replacement cost – that is, the cost to rebuild the home. An assessed or appraised value will adjust for depreciation, which reduces your home's value due to age and wear and tear. Assessed values often are based on data from the prior year which, when combined with depreciation, will be a poor gauge of the home's reconstruction cost. An appraisal takes into account depreciation and other market factors as well, so that isn't a good guide for the replacement cost either.

So how does PEMCO determine replacement cost? When writing your policy, we'll ask a lot of questions about the home and input the data into a valuation tool. Such tools are commonly used in the insurance industry since they factor labor and material costs, the age of the structure, geography, and ease of access to the site when calculating the replacement cost. The tool also helps determine the right amount of coverage for other structures on the property such as garages, swimming pools, and tool sheds. We'll also be sure to include enough coverage for costs you might have overlooked, like removing debris from the property after a loss.

Further, to save you the hassle of contacting us each year to adjust coverage, we'll increase it by a small amount at renewal to keep pace with inflation. Remodeling, changes to building materials like flooring or siding, or adding square footage or decks may significantly boost value, so always contact PEMCO or your agent to tell us.

For many, our homes are our biggest asset, so it's important to insure your home adequately. PEMCO is here to ensure that!

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