By Bill Howard
Industry statistics confirm that most current homeowners’ policies do not provide sufficient coverage to fully replace their homes of a similar kind and quality of materials at current prices. It is crucial that you maintain sufficient coverage for your home to rebuild to the same quality level in the event of a major loss.
The replacement cost is the current cost of rebuilding your home with materials of like kind and quality at current market price if the home is declared a total loss due to fire or other covered peril.
Don’t be the one, after a major loss, to discover your coverage limits are not adequate. That is not the time to educate yourself on home insurance valuation. Check with your insurance carrier to determine how much they would pay in the event of a total loss. Many quality carriers offer guaranteed replacement of the dwelling should the claim exceed your coverage limit.
The Insurance Information Institute cites:
- One in 18 insured homes has a claim.
- One in 35 insured homes has a property damage claim related to wind or hail.
- One in 60 insured homes has a property damage claim caused by water damage or freezing.
- One in 425 insured homes has a property damage claim related to fire or lightning.
- One in 700 insured homes has a property damage claim due to theft.
- One in 1,100 homeowners policies has a liability claim related to the cost of lawsuits.
Replacement cost, market value and assessed value are different concepts. Market and assessed value are influenced by factors like supply and demand, recent sales in the area, a hot or cold real estate market, interest rates, property condition and location. Market value is the price at which a property would sell on the open market, whereas replacement cost represents the actual cost to rebuild a home as is, with the same level of detail and finishes.
The replacement cost is based on characteristics and finishes of the home; current and projected material and labor costs; architect, design, construction site managers and contractor fees; and building code upgrades.
There are several factors that can impact the replacement cost of your home, including:
- Client urgency to rebuild;
- Availability of reconstruction contractors, particularly after a catastrophe;
- Compliance with updated building code requirements;
- Lack of economies of scale on single-home reconstruction;
- Quality and quantity of custom high-end finishes, features and materials;
- Architectural details and design of the home;
- Scheduling issues;
- Resource availability;
- Accessibility of the site; and
- Cost of debris removal.
The writer has been an insurance broker at Clarke & Sampson, Inc. in Alexandria for more than 30 years.