Market Value vs. Reconstruction Cost – The Difference


“Why does my Homeowner coverage keep increasing when the market value doesn’t?”
is a common question.

Market Value

Market value is what your home/building and land would sell for in the real estate market. Your selling price could be determined by using comparables, market trends, seasonality, and other available data. Supply and demand then determine the final price. The market value could be more or less than the insurance coverage on your policy.

Reconstruction Costs

Reconstruction costs are what it would require to replace your home/building based on current costs of materials and labor, contemplating items like size, age, special features, etc. Reconstruction Costs are the actual costs to repair/replace—without deduction for depreciation—using current standards and building codes that include fees associated with architects, contractors, builders profit, etc. It does not include land value.

Components that affect Reconstruction Costs include:
Costs of materials
Local labor rates
Changing building codes/standards
Demolition costs
Debris removal (of the prior structure if destroyed by fire, tornado, etc.)
Temporary demand surge – If a tornado damages several homes throughout a particular area, this would cause the demand for labor and materials to be higher and temporarily increase prices.
Fuel/energy costs

It is impossible to predict today what the exact reconstruction costs will be to replace a home after a future claim. So it is important to have ample coverage to account for an unforeseen situation. Your Homeowner policy should also include an additional coverage called Enhanced Replacement Cost which provides an additional 25%-50% above the coverage limit stated on your policy, or Guaranteed Replacement Cost which totally removes the ceiling of insurance, both of which are designed to protect against unanticipated rising construction costs.

Taking the discussion further:  Reconstruction vs. New Construction (Excellent article!)

Posts on are written in plain language for informational purposes only. They are not policy forms or parts of an insurance policy. For exact language, see the insurance policy provided by your carrier.

About Author

Cameron A. Shandersky, CPCU
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