Home prices in Florida have fallen an average of 47 percent over the past five years. But home insurance premiums and the cost to rebuild seem to be increasing.. Why? Shouldn’t cheaper home prices mean cheaper insurance?

The short answer is no. Typically, the market value of an existing home is not directly related to the replacement cost of the home. In other words, the sales price does not have a direct relation to what it would cost to repair or replace the home if it were damaged by fire, vandalism or some other insured event.

The market value, or what someone is willing to pay you for your home, takes into account items not covered on a home insurance policy. Your land might be worth a lot because it sits on the ocean, Intracoastal or an exclusive golf course. It could be worth more because your neighborhood is zoned for an A-rated school. None of those have anything to do with the cost of replacing a bathroom damaged by a broken water pipe.

When insurance companies calculate the replacement cost of a home, they figure the cost based on the labor and materials needed to produce the same building with the same quality. Those expenses are based on today’s prices for walls, flooring, appliances, and so on, plus what contractors are charging. If the cost of lumber and petroleum-based products such as roof shingles increase, so will the cost to replace the home. In addition, a natural disaster (think hurricane) may create temporary shortages of essentials such as roof tiles and thereby force up prices. If the initial replacement-cost estimate is done incorrectly or if subsequent replacement cost estimates are not done regularly, you may not have enough insurance to cover the costs to repair your home.

How much is enough? You can find out ahead of time.  Replacement cost-estimating companies such Marshall & Swift/Boeckh and ISO have developed detailed tools to help you and your trusted insurance agent determine a reasonable estimate. Both companies have teams of people who price the cost of materials and labor around the country. They regularly update the figures to stay current with building material and labor costs.

The results of a replacement cost estimate may surprise you. Even while the market price of your home has plunged, you may not have enough protection. Your insurance agent can help you work through the math. When you sit down with your agent, set aside any estimates on what your house is worth on the open market. Focus instead on what it would cost to restore your home to the beauty and comfort you enjoy today. 

About the Author

Clint B. Strauch, CIC, is a co-founder of Florida Peninsula Insurance Co. and serves as chief operation officer. Previously, he was an Allstate agent for 17 years.