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  #1  
Old 05-15-2018, 08:54 AM
my_alt my_alt is offline
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Default Homeowners Replacement Cost Estimate

My mortgage company and my insurance company disagree on how much coverage I need. Even after factoring in the overage allowance, the insurance company is almost $100k lower.

The mortgage company's estimate is based on the appraisal we got when we bought, less the value of the land. Not really sure what the insurer's estimate is based on other than square footage and general home quality.

Obvious dilemmas are obvious. How accurate are insurers' replacement cost estimates?
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Old 05-15-2018, 09:44 AM
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Originally Posted by my_alt View Post
My mortgage company and my insurance company disagree on how much coverage I need. Even after factoring in the overage allowance, the insurance company is almost $100k lower.

The mortgage company's estimate is based on the appraisal we got when we bought, less the value of the land. Not really sure what the insurer's estimate is based on other than square footage and general home quality.

Obvious dilemmas are obvious. How accurate are insurers' replacement cost estimates?
The appraisal isn't really what you care about since that's the market value of the home, although they've tried to adjust this a bit by subtracting land value. Typically the insurer is focused on cost to rebuild the house to its current state in the event of a total loss. This often results in a coverage amount that's larger than what you could likely sell the house for since they're two only tangentially related things (how much someone would pay for your house today, vs how much it would cost to hire builders to actually make the house were it to be destroyed).
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Old 05-15-2018, 09:51 AM
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The appraisal isn't really what you care about since that's the market value of the home, although they've tried to adjust this a bit by subtracting land value. Typically the insurer is focused on cost to rebuild the house to its current state in the event of a total loss. This often results in a coverage amount that's larger than what you could likely sell the house for since they're two only tangentially related things (how much someone would pay for your house today, vs how much it would cost to hire builders to actually make the house were it to be destroyed).
in addition to the costs of rebuilding are the costs of remediating the site (demolition/debris removal) prior to rebuilding, which can add to the cost significantly.

Your mortgage company wants their loan to be financially covered. The insurance company wants to replace the home. They aren't the same thing depending on the market for homes in the area.
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Old 05-15-2018, 10:01 AM
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The appraisal isn't really what you care about since that's the market value of the home, although they've tried to adjust this a bit by subtracting land value. Typically the insurer is focused on cost to rebuild the house to its current state in the event of a total loss. This often results in a coverage amount that's larger than what you could likely sell the house for since they're two only tangentially related things (how much someone would pay for your house today, vs how much it would cost to hire builders to actually make the house were it to be destroyed).
The bolded is why I'm confused. What you said is what I expected, and I'd have no problem with that. My situation is the opposite. I'm currently buying a lot more coverage than my insurer thinks I need.
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Old 05-15-2018, 10:05 AM
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The bolded is why I'm confused. What you said is what I expected, and I'd have no problem with that. My situation is the opposite. I'm currently buying a lot more coverage than my insurer thinks I need.
That's definitely an atypical situation from my experience, although I don't want to say something like "well you should just buy less coverage then" since that's something an underwriter/insurance agent is better positioned to advise on and they actually have liability on that stuff if they get it wrong.

I wouldn't be surprised if the bank assumes that the market value of the house must be less than the cost to rebuild since that's typical and that drives their push to get you to overinsure. I'm not sure how you could confirm your cost to rebuild other than asking another insurer for a quote. Some insurers will actually send a guy out to inspect the place so I imagine it's a decent estimate of cost to rebuild, especially if they guarantee it in the contract they'll definitely want to make sure its close.
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Old 05-15-2018, 10:17 AM
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If the insurer did not send out an inspector before quoting the policy, you might want to find out what they used for data on your house. If they used information from the tax records or from the real estate listing, check and make sure those are accurate. When we insured our current home, several things they had as specs for our home were wrong.
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Old 05-15-2018, 12:50 PM
IANAE IANAE is offline
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Your mortgage company wants their loan to be financially covered. The insurance company wants to replace the home. They aren't the same thing depending on the market for homes in the area.
Insured value may be based on a mortgage co's simple formula or more likely to make sure their OSB is covered in any event and thus may factor in adequate replacement cost coverage i.e., either guaranteed RC or solving for adequate insured value if limited RC.

Check out your mortgage docs.
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Old 05-15-2018, 03:42 PM
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in addition to the costs of rebuilding are the costs of remediating the site (demolition/debris removal) prior to rebuilding, which can add to the cost significantly.

Your mortgage company wants their loan to be financially covered. The insurance company wants to replace the home. They aren't the same thing depending on the market for homes in the area.
The bolded is generally not part of calculating replacement costs as those values are not easily determined in advance; nor is it always a cost that will be incurred if there is a claim.

ISO forms allow for a sublimit for such costs with an endorsement available to extend those costs to be above the selected Coverage A limit.

"Replacement Cost" is generally the cost to rebuild the structure "from scratch".
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Old 05-15-2018, 03:44 PM
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Originally Posted by Maine-iac View Post
If the insurer did not send out an inspector before quoting the policy, you might want to find out what they used for data on your house. If they used information from the tax records or from the real estate listing, check and make sure those are accurate. When we insured our current home, several things they had as specs for our home were wrong.
Might also check to be sure that the "land value" in those tax documents are also correct. If the dwelling is built on a sub-divided plot of land, the tax document may still reflect the value of the larger parcel.
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