Adjusting the replacement cost from calculated to actual purchase price

Asked by Roti, 19010 Sun Sep 13, 2009

I am in a process of buying a home. Purchase price is 350k. But when I went to shop for insurance, the agent says the replacement cost of the house is 595k and insurance cost will be around 1,600 annually. My question is, does the premium vary with the replacement cost? If it does, can I ask them to adjust the replacement cost to the purchase price? Would that make a big difference in the premium? And what will be the disadvantage and advantage of adjusting the replacement cost? Is it wise to do that if I do adjust the replacement cost?

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Kathy Brennan’s answer
Kathy Brennan, , Seal Beach, CA
Mon Sep 14, 2009
I am an insurance agent in CA not FL. You are not telling us how big the house is? For example if the house is 2000 sq feet and the insurance company calculates cov A at $250.00 sq foot this would give u a replacement cost of $500,000. We never use purchase price which includes the land and location. We say land does not burn, float away and it can not be stolen. Land does burn but it recovers on it's own... Hey it's a saying I was trained to use and I have been an insurance agent for 12 years. You have different insurance concerns in FL than we have in CA but i hope this basic example helps a little.
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Donald Steve…, Agent, Fontana, CA
Mon Sep 14, 2009
Companies generally offer one of three types insurance. Replacment, ACV (Actual Cash Value), and Market Value. The first two types are the most common.

Replacement cost is the cost to rebuild your home today. Most replacement cost estimates seem like a high amount and usually is the most expensive policy. The reason the replacment value is high is because you don't know when you are going to need your home replaced. If there is a natural disaster like Katrina and your house burns down to the ground at the same time but due to other causes, your home has to compete for goods and services which are now at a higher price. Also most Replacement cost policies will only cover 100% of the rebuild if you are insured up to the coninsurance amount which is commonly set at 80%. If you are insured at 50% of replacement cost at the time of the claim, they will only pay 50% of the cost to rebuild. Better to play it safe and make sure the company pays for the repairs you paid them to insure against.

ACV or actual cash value is the replacement cost minus a depreciation amount. This coverage is similiar to auto insurance. If you have comprehensive and collision coverage on a new F-150 truck the company may pay 30k if the truck is totaled. In 5 years if you have the same policy they may only pay 15k. That is because the truck is worth less today than it did when it was new. That is how ACV works. And it also needs to be insured to a specified amount if the policy has a coninsurance clause. Basically in the event of a total loss, you could pay out of pocket the depreciation value which could be up to 50% plus whatever percent you are short on your coinsurance. This could add up to a financially devastating amount.

Market value is exactly that. In the event of a total loss they will pay you what the house is worth on the market. If it is a partial loss, most companies will pay ACV. This is fine if you are only worried about a complete loss and would rather buy another house like yours rather than waiting for the house to be rebuilt.

You really get what you pay for. I hope this helps.

The Home Insurance Specialists
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Nick & Trudy…, Agent, Devon, PA
Sun Sep 13, 2009
Whilst you may think Roti that you want the replacement cost adjusted to the purchase price this might leave you under-insured. What your agent is calculating is the cost to build a replacement home. They generally use standard figures for this. obviously some of the cost of your purchase is for land and some is for the current building. What you pay for the actual building at settlement is not necessarily what it might cost to rebuild it as building costs have risen. Also the cost of your home is generally about 2/3rds the cost of the purchase and the ther 1/3 is for the land. Also if you have the house rebuilt exactly as is the insurance can be more than if you have just a lower level of remplacement. Also factor in that if you add auto insurance you will gain discounts for both parts of your insurance because of the mulitple policies.

My suggestion would be to price around and make sure you ask the agents to explain what they are covering exactly. You want to avoid being inder-insured if there is a fire for example and then find you cannot rebuild and are left with a vacant lot. Obviously your lender wants the house insured to cover their investment.
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John Badalam…, Agent, Wayne, PA
Sun Sep 13, 2009
Roti: Insurance in Pennsylvania is regulated by the Pennsylvania Insurance Department.

The following is a PDF link that offer a guide the Homeowner's Insurance published by the PID:…

This may answer some of your questions. I hope you find it helpful!

John (John B.) Badalamenti, CRS, ABR, SRES
Associate Broker
Certified Residential Specialist/Relocation Specialist
Prudential Fox & Roach, REALTORS – Wayne
610-688-4310 Office
610-341-4832 Direct Email Web 1 Web 2
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