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Ask An Agent - How is Home Value Determined?

houses in a row


Question: How does an insurance company determine the value of my home?


Answer:  That’s a great question, and one that we hear frequently.  Because a house is probably the single-biggest investment you’ll make in your life, getting the appropriate insurance coverage is critical.  To ensure the coverage is correct, the insurance company must determine what the house is worth.


You will often see several different values for a given property… 

  • Assessors' Value - This is a value established by local government which is used to determine property taxes.  This is typically (though not always) the lowest valuation. 
  • Real Estate Value - This is the selling price of a home “on the market”.  Websites like and allow home shoppers to see the retail price of homes.  These prices fluctuate based upon marketplace issues. 
  • Reconstruction Cost - This is the cost to actually rebuild a home, and is the value used on insurance policies.


Reconstruction cost (also called replacement cost) is not related to the purchase price, mortgage value, taxable value, or market value of a house.

Here is a typical example:  Joe and Mary purchase a home.  The home is 15 years old and they paid $240,000.  When they buy homeowners insurance, the home value on the policy is $280,000!  Why the difference?

Insurance companies use valuation estimators to determine reconstruction cost.  Factors such as raw materials and labor costs, labor availability and building codes come into play when determining reconstruction cost.  Reconstruction value is often the higher valuation, but reconstructing your home after a loss is the benefit the homeowners insurance policy delivers.

Experience has shown that in the event of a total loss these reconstruction cost estimators have been incredibly accurate, and people are generally happy with the limits used.  An interesting thing to note… during the housing boom of the 1980s and 1990s reconstruction cost was often less than retail cost.  But since the housing bust of the last decade, reconstruction cost has been higher.  So, for homeowners insurance, reconstruction cost valuation is the way to go.