Reprinted below is an article from Working RE that talks
how the cost approach for appraisal purposes is not the same as a cost
approach done for insurance purposes.
What does this mean to you?
Simple- if you are getting a new mortgage then your lender most likely
will require that you have homeowner's insurance. Many lenders determine
how much insurance you need by deconstructing the cost approach done by
the appraiser. The problem is that the appraiser completes the cost
approach specifically for the purposes of value- NOT for insurance
purposes. The cost approach figures in the appraisal are more than
likely not the same figures that your insurance company would use. This
means that you could be required by your lender to purchase too much or
too little insurance for your property.
Why do they do this?
They are trying to save money. The lending business is extremely
competitive and the lenders with the lowest costs usually have an
advantage. In this situation, lenders are trying to save money by
incorrectly using the data in the appraisal for a use for which is
What's the solution to this
Consult with your insurance company and ask them to recommend how much
insurance you need based upon their advice. Don't trust the appraiser's
figures for this purpose.
Click above for article