Insuring a new home purchase properly can involve a lot of factors that a buyer may not be aware of. One important distinction is difference in valuation between the market value and the replacement cost of the home. In newer homes, built after 1990, the replacement cost and the market value can be very close, but in older homes there may be a sizable disparity between the market value and the replacement cost value of the home.
When purchasing a home insurance policy you should only consider policies that are offering replacement cost protection. The reasoning for this is that when you purchase a market value insurance policy you can inherit certain coverage pitfalls that could create a negative claims situation. Market value home insurance policies have a tendency to be set up on a depreciation schedule. Meaning that an insurance company will assign a certain depreciated value to each year of age for the home. In the event of total or partial loss there is no way to guarantee that a claim will be paid properly and the homeowner’s asset will be protected.
Depending on the carrier that has written your market value policy, you may also be subject to certain exclusions of insurance coverage not written into a home insurance policy with a replacement cost valuation. Market value insurance has a tendency to written on a stated perils basis. This means that a loss could only be covered if the policy says that there is coverage for the specific cause of damage, whereas on a replacement valued and covered policy the coverage is written on stated exclusions basis. The distinction being that with a replacement coverage policy, coverage will be in place unless the policy states that coverage will not be awarded. A few good examples of something that might be excluded from a replacement cost policy are earthquake and surface water.
There are limitless options available to consumers when it comes to finding an insurance policy for your home. In the same way you would trust your realtor to guide you towards a home that will satisfy your needs. You will also want to find an insurance agent that will educate you on the coverage needed to properly protect your new home purchase.
Kevin Butz is the Operations Manager at Crawford Butz Insurance and is a licensed insurance agent in Missouri.