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If you’re buying a house, you likely have a good idea of what it’s worth. Between conversations with a realtor, the purchase contract, and the appraisal, there are several pieces of data that help you understand the home’s value.
As part of the purchase process, you are required to get homeowner’s insurance. On the insurance quote, there is an item called dwelling coverage. In most cases, this number maybe higher than what you believe the home to be valued at—why?
First, let’s define dwelling coverage: dwelling coverage is not correlated to the “Fair Market Value” of the home. Dwelling coverage is what the insurance carrier has determined it would cost to rebuild your home in the event of a total loss. More importantly, in Florida, what it would cost to rebuild your home at the time of a CAT 5 hurricane loss (Worst case scenario). For example, if the home were to suffer major damage from a CAT 5 hurricane, the dwelling coverage amount is what the insurance company would pay to help rebuild your home to how it was before the hurricane.
Now, let’s define Fair Market; Value: Fair Market Value is an amount that someone is willing to pay for your home including the land. In most cases, unless you own a condo or townhome, home this value includes the land as well. However, in Florida, we also have one more item to consider, the cost to rebuild your home at the time of a CAT 5 hurricane. This is a very important factor considering the fact that when an area is hit by a CAT 5 hurricane, the price of goods go up, not down. In addition, states go on lock down and prevent people from entering. This means labor shortages, lag time on building supplies and collateral damage to structures that are already in need of repair. In addition, a lot of homeowners who have evacuated, are not allowed back into the state to assess the damage on their own homes, which creates a delay in filing claims and scheduling repairs.
Why the difference?
As you have probably surmised, the insurance company is not insuring the land, they are only insuring the structure. As a result, the difference between the dwelling coverage and the home value is most often the value of the land the home sits on and the estimated cost to repair the home at the time of a CAT 5 hurricane. So, the dwelling coverage will almost always be different than the Fair Market Value.
PRO TIP: Fair Market Values fluctuate based on the housing market. Dwelling values are much more stable from year to year due to the above items.
PRO TIP: Your home insurance policy has a built-in inflation guard in your home insurance policy. This is designed to keep up with the cost of inflation and will increase the dwelling value every year, automatically. This is to prevent a home owner from being under insured at the time of a loss. This coverage stems from Hurricane Andrew in the 90’s, where home insurance values had never been updated and the cost to rebuild them after Andrew was woefully insufficient.
If you have any questions with regards to your dwelling coverage amounts, fell free to schedule an appointment with one of our licensed account executives.
