Why would I insure my house for more than it's worth?

tornado-damage-us-army-corps-of-engineers-savannah-districtWhy should I have to insure my home for more than it’s valued? Often we in the insurance industry will come up with an amount that we feel the property should be insured for that is greater than the amount the owner recently paid for it or the amount of the appraisal. You would think insurance companies wouldn’t want to insure something for more than was paid for it. Wouldn’t this possibly be creating a situation where the property owner could profit from his/her loss?

Let’s pause for a moment and consider what we’re trying to accomplish here. Remember, we’re trying to arrive at an adequate amount to re-construct your property. There can be a big difference between construction cost or appraised value versus what it actually costs to re-construct.

As an example let’s look at the damage the tornados caused in Alabama a few years back. Not only were homes and businesses extensively damaged or destroyed, there were mountains of debris that had to be removed and disposed of before work could begin. Once that was removed, if there was property inside that could be salvaged, that had to be removed, cleaned and stored. Then the process of removing the building/s and disposing of the materials could begin. Only at that point can the lot be prepared for the foundation and re-construction begin.

So, you can see there can possibly be a much greater cost to re-construct than there would be to initially construct. That’s what’s figured into our replacement cost calculations and the reason our figures are higher than some might think they should be. If you only insure for the appraised value, you quite possibly will come up short and have to pay thousands of dollars out of your pocket.