You buy it for $143,000 / 1,555 = $86 per square foot market value
Say you own that house today and it burns to the ground or a tornado blows most of it away and you want to replace the house with one that is similar in size and features.
You will hire a contractor to demolish what remains of the old structure, then you will pay to dispose of that material, you will likely have to redo all the plumbing, gas, and electric from the street to the home. This can cost you anywhere from $10,000 to $20,000 or even more.
$143,000 - $20,000 leaves you $123,000 for the rebuild. (you have $79 per sqft to rebuild)
Your city zoning may require updates to bring the replacement house inline with current regulations. If the home was partially damaged the city can require you to make updates to the UNDAMAGED part of the home to bring it inline with current code. Was the old house too close to the set back or property line? Was there some feature that was grandfathered in? Uh-Oh!
$123,000 - $5000 = leaves you $118,000 (you have $75 per square foot to rebuild)
Now you get to start getting bids, submitting plans to the building department, pulling permits, buying materials, and hiring laborers. By the way you currently live in a hotel, eat all your meals in restaurants, dry-clean your clothes, and your pets are at a boarding facility. These items are covered seperately on your policy - how long does your company give you? Some companies only pay out for 6 months. Can you demo and rebuild an entire home in 6 months?
Status update: life stinks! You want that house built and you want it now - meaning you are going to basically pay the big box retail rate for materials. Do you want the contractor to drop everything and start on your project now? That will also cost you!!
Maybe you live somewhere it snows and it's impossible to put up a roof, pour cement, etc this can delay the process or adds significant cost to the project.
Does any of the above have anything to do with what you paid for the house?
Is the cost of labor and materials more or less than when the home was built?
Can you say Tsunami, Forest Fires, Hurricane Katrina, Sandy, etc - The cost of materials has skyrocketed in the last 10 years.
Your insurance company is going to use a reliable contractor with a good reputation, who is bonded and insured, and who will usually put a guarantee on the work that is done. Not mr el-cheapo down the street
Try calling a couple big name contractors with a good reputation in your area and ask them this...
If a house was total loss - what dollars per square foot would they estimate the cost to rebuild the home. In the mid west your low end number is going to run $130 to $150 per square foot on the repair.
In the past decade or so, many insurance companies got in a variety of sticky legal situations due to the property they wrote policies on being under insured. The backlash from this is that many of companies that offer homeowners insurance have significantly beefed up their estimates of replacement cost.
It also depends greatly on the property. Newer homes using modern materials will typically have replacement costs more in line with property values, however older homes using outdated materials or historic homes can have replacement costs sometimes double the market value.
One way around this is to have your insurance agent set up your policy to provide coverage not to rebuild the home you have in case of a total loss, but a functional replacement using modern materials.
I also recommend contacting an insurance broker who can shop your insurance around through multiple companies to find you the best coverage for the most competitive rate. Insurance companies have wildly different guidelines from one another which results in the huge discrepancy in rates. We refer to this in the insurance industry as the company's "appetite." For instance, one company may be trying to avoid fire claims more so than their competitors, so they give a much better rate to homes made entirely of brick. An insurance broker can help you navigate between these types of companies, whereas a captive agent who only represents one insurer can only operate within that one company's underwriting guidelines. It's also very tedious to contact a bunch of insurance companies directly.
Bank appraisals are used to determine the fair market value of the home - ie: what could they get in a sale if they had to repossess the home then liquidate.
Insurance company appraisals are used to determine how much it will cost to rebuild if the structure is totaled.
The relationship between the 2 is not always 1 to 1 - sometimes, resale is less then the cost to construct. Other times, the land cost is significant, so resale is significantly more than construction costs.
Additionally, conservative professionals will keep bank appraisals on the low side and insurance company appraisals on the high side - err on the side of caution...