Does Appreciation in the Real Estate Market Necessitate Higher Homeowner Policy Limits?

J.P. Gonzalez-Sirgo
Founder of J.P. Gonzalez-Sirgo, P.A.

Individuals purchase homeowner insurance policies to protect what for many families is their most valuable asset.  While many families suffered substantial losses in home equity when the real estate bubble burst several years ago, home prices have now seen fairly consistent increases over the last few years.  This begs the question, whether an increase in their home value necessitates obtaining coverage with a higher policy limits along with the premium increases that accompany more extensive coverage.  Rising property values do not necessarily mean you need to increase your homeowner policy limits.

Market Value vs. Replacement Value

Resurgent real estate prices impact the market value of your home, which includes the location, view, and the value of the land.  While these are important components of the value of your home when you are selling, they are not relevant to replacement value, which is what your homeowner policy is designed to cover.  The replacement value does not include the value of the land or the value of a desirable neighborhood.  When determining replacement value the issue that must be addressed involves the cost to rebuild your home from the ground up in the event of a total loss because of a covered peril like a hurricane, fire, or flood.

Because the homeowner policy will only cover replacement cost in the event of a catastrophic loss, your coverage should be based on the value of the actual loss that can be replaced, which does not include monetary payment for the location or plot of land where your home is located.  Further, many homeowner policies have provisions referred to as inflation guard coverage that compensate for upward changes in the value of the real estate market and inflation by adjusting the estimated value of your policy by approximately 3-5 percent annually.  However, you should not assume that you policy includes this provision without reviewing your policy and/or talking to a representative from your insurance company.

Situations Where Increased Market Value Merits Increasing Policy Limits

As a general rule, an increase in property value due to changing real estate market conditions does not justify increasing your homeowner insurance coverage.  However, there are situations where you might want to review your policy limits and make adjustments.  If you make significant improvements or additions to the property that impact the market value, this type of change to the property might justify revisiting your coverage.  When homeowners build an extra bedroom, second story or swimming pool, these types of improvements can have a significant enough impact on the replacement value of the home to justify adjusting policy limits.  Similarly, you may remodel a kitchen using more expensive appliances and materials.  This type of improvement might also merit having the replacement cost of your home recalculated.  Rising contruction costs may also merit increasing your coverage.  Your insurance broker or agent should be able to help you calculate the proper amount of coverage for your home. 

You can reach Miami Insurance Claims Lawyer J.P. Gonzalez-Sirgo by dialing his direct number at (786) 272-5841, calling the main office at (305) 461-1095, or Toll Free at 1 (866) 71-CLAIM or email Attorney Gonzalez-Sirgo directly at [email protected].

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