Why does homeowner’s insurance cover more than market value?

One of the most common misconceptions, and sources of frustration, around homeowner’s insurance is insuring a house for more than the market value. This is especially true right now due to market factors outside the control of you and your insurance agent.

“Homeowner’s insurance is about insuring your home for what it would cost to replace or rebuild it, not for what you paid for the house or what you could sell it for,” said Matt Georgopulos, Risk Advisor with Muir Insurance Group. “Right now, there are 3 big market factors, that neither homeowners or insurance agents can control, that are causing a triple whammy effect on home insurance prices,” continued Georgopulos.


The cost of construction materials has skyrocketed due to shortages caused by supply chain disruptions and increased competition. “In some cases in the last year, we’ve heard some contractors say that their clients voluntarily pay higher prices to guarantee supplies ahead of other buyers”, says Georgopulos. While this phenomenon is likely temporary and should hopefully subside soon, it still contributes to higher estimated construction costs for everyone. Higher construction costs translate into higher coverage limits for homeowners, which naturally mean higher premiums on insurance policies too.


There is a distinct shortage in skilled labor, especially in the homebuilding industry like electricians, plumbers, and HVAC contractors. This cost, in addition to rising materials costs, further conflates the problem of how much it costs to insure our homes.


One factor less obvious than the above is higher than normal interest rates are depressing the market value and purchase price of homes. A home that may have sold for $400,000 a year ago, may now only sell for $380,000. This does not mean that the price to repair or replace the home has also decreased. Homeowners may think it’s strange to insure a home for significantly more than they just paid for it, but it’s important to remember that insurance isn’t about what you paid for a home, but what it would cost to replace it.


If you have questions about your homeowner’s insurance, never hesitate to ask your agent. A review of your policy could uncover unnecessary risks or opportunities for savings. Always make sure you have the best carrier, coverage, and cost for your individual homeowner’s insurance needs.

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