Do you have to buy flood insurance based on the appraised or market value of your house or home?


Let us first have some definition of terms to help in our discussion and to clear away any confusion. Often the terms "appraised value" and "market value" are considered interchangeable.

However, when we talk about flood insurance, these two are different terms.

  • Appraised value for flood insurance is made based on a cost approach, meaning, "how much would it cost to rebuild the house or property?" This is sometimes referred to as the replacement cost value.
  • Market value is different in that it considers how much people are willing to pay for the house based on several factors such as its location, past owners or historical value.

With a market value approach, the same house built in California and Wisconsin may cost differently. With an appraised value or cost-based approach, the two houses will basically cost the same, as they were built with the same specifications and materials.

Another aspect of current market value would be the fact that depreciation is also included in the computation. This can greatly affect the current market value of an older property, especially if the home is over 5 years old.

The NFIP, which provides coverage for flood insurance, has set guidelines as to who they will issue flood insurance to. Their guidelines state that "the required amount of flood insurance must at least be, but is not limited to, the lowest of:

  1. the outstanding principal balances of the loan(s);
  2. the maximum amount of coverage available under the NFIP for the particular type of building; or
  3. the full insurable value of the building and/or its contents, which is the same as 100% replacement cost value (RCV)."

Thus, one of the bases you can use when you buy flood insurance would be the replacement cost value. This is a good basis since getting cover based on current market value may not cover what you will need in case a flood passes through your home and creates considerable damage. Market value will be drastically affected. With replacement value, you can at least get a considerable sum to help you rebuild your home.

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