What is the difference between Market Share, Actual Cash Value and Replacement Cost on a single family home dwelling?
Let me start by painting a picture. You are buying a home for your family. It is a 1,400 square foot house with 4 bedrooms, 2 bathrooms, with recently upgraded floors, fixtures and a new interior paint job.
The house was built in 1968 on a crawlspace foundation, and the old one car attached garage has long since been sealed off and transformed into living space. With a spacious backyard that includes a covered wooden porch, you can already feel the warm evening air with a cold glass of ice tea in your hand, watching the kids play in the yard.
Everything comes together and you are given the green light to purchase the home. The seller's asking price is $75,000 but your offer of $72,500 is accepted.
At just the right time your insurance agent provides a couple quotes for you to look over.
It doesn't take long before you notice that the quote says you will have to pay for a $140,000 house.
Wait a minute! How can this house be a $140,000 house if I'm buying it for half of that? Mr. Agent got the wrong house!
This is the dilemma between Market Value and Replacement Cost. This is where you have to ask yourself if you want to insure the dwelling or the amount of money that you agreed to purchase the dwelling for.
52 years ago, when this house was built, the value of the materials and labor to build the house was not $140,000. It wasn't $72,500 either. That doesn't matter.
The question is, what would it cost in today's dollars to rebuild this house from the dirt up?
There are many factors involved in this equation: the availability and cost of materials, cost of labor, the accessibility of the construction site where the house will sit, etc.
Location, location, location has nothing (or very little) to do with rebuilding the dwelling. Where your house sits is totally (mostly) a market issue.
The mortgage company is not going to allow you to insure the home for less than the amount of the loan, which in many cases is even less than the market value.
On the other hand, the insurance company is not going to allow you to make a profit off of the loss of your home. If your house burns down 10 minutes after you close, it won't be as simple as collecting a $140,000 check. (That's a whole other topic: Insurance Fraud)
You may be thinking, "It's a 50 year old, 1400 square foot house. There is no way it is worth $140,000."
You are partially correct. There is 50 years worth of depreciation to the individual components of the house - other than those nice new floors - and the house as a whole.
This thought is on the track of Actual Cash Value.
Actual Cash Value takes into account the depreciation of the dwelling; Replacement Cost does not. Depreciation means a decrease in value due to wear and tear, decay, etc.
In this example, Actual Cash Value is likely much closer to the Market Value than it is to Replacement Cost Value.
Some companies allow what is called "Modified Replacement Cost" on your policy, where you are purchasing replacement cost valuation coverage on the dwelling but at a lower dollar amount than what it would cost to completely replace the house.
So what should you do?
If your Oklahoma home gets 'blowed away', are you more concerned with getting the mortgage company the money they loaned you or do you care more about getting your home back?
At replacement cost, the insurance company is not going to go out and find 52 year old materials that put together an identical house for you. No, they are going to bring in all new materials and build a house as close as possible to a match with your old house.
New house - no longer a 52 year-old house. Actual cash value has increased. Market value has increased (maybe only slightly). You have been made whole.
That is the purpose of property insurance. To make you whole after you have sustained a loss to an insured property.
Don't allow an insurance company to charge you off of a guess about the unique features of your home. Sit down with your agent and go over the replacement cost estimator line by line. You'll be more comfortable with your policy and what you are covering.