Home Insurance: Replacement Cost versus Market Value!
Tumbling house prices may have you wondering whether homeowners' insurance premiums will fall too
That's a fair question. But the answer is not as straightforward as you might think. Although median house prices in the US are down from the height of the housing bubble, don’t expect to be able to cut your home insurance premiums by the same amount.
For a start, your homeowners' insurance policy covers a lot more than your structure. It probably also covers contents – and the replacement cost of those is more likely to have gone up than down – and third party liability.
But the most critical factor in evaluating your home insurance coverage is that the buildings element of your policy should not be based purely on the market value of your home but more importantly on the cost of reconstructing it.
Although these are tough times for builders, there's no real evidence that house construction costs have fallen. WBAL TV recently reported that according to a 2013 report by Marshall and Swift/Boeckh, 60% of homes in the US are underinsured by an average of 17%! That is nearly two thirds of home that are under insured!
In the unfortunate event of a loss, it is vital that you have sufficient home insurance coverage to rebuild your home to pre-loss condition. Having the home properly valued on the home insurance policy also helps assist in a quicker, easier claim settlement. So how do we calculate this home reconstruction cost? One key thing to remember is that the calculation method that we use to determine replacement of a home is based on reconstruction costs, not market value, or even the cost of new construction.
The reconstruction cost of a house is the cost to rebuild today with similar materials and craftsmanship, used during its original construction. Building experts say that reconstruction of a house can cost up to 30% more than to build it new. Builders hired for reconstruction require a higher skill set since they are required to work around existing structures, landscaping, and power lines. They also need to be able to match up new materials to existing materials. We use reconstruction cost because it most closely approximates the cost to rebuild their home to pre-loss condition.
That means, it makes sense, one way or the other, to regularly check that your homeowners' insurance policy accurately reflects the cost of rebuilding it. There are several ways:
- Many insurers keep records on rebuilding costs and automatically adjust policies to reflect changes.
- Talk to us. Insurance agents have their finger on the pulse and know how to get the information you need.
- There are a number of online calculators which claim to be able to produce accurate figures. If you use these, you're best to crosscheck between several. Beware: some of them charge for the service.
- You can ask a builder to do a walk-through with you and estimate the reconstruction cost.
- You can pay an appraiser to do a full inspection.
Huff Insurance is a local Trusted Choice Independent Insurance Agency Protecting Lifestyles™ of our clients since 1960. We are here to customize an insurance protection plan to meet your needs make sure you understand your insurance protection plan.
If you have any questions regarding anything I have discussed in this blog, feel free to give my office a call at 410-647-1111.