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