Let’s compare insurance coverage to market value. The biggest misconception policyholders make when evaluating if their home has proper coverage is using market value as a cost basis. Reconstruction cost is the cost to hire a contractor to replace the home as it is, using materials and design of similar quality. This amount isn’t the same as market value, which is the value that comparable homes are selling for. Reconstruction cost can be much higher.
There are many factors that play into the cost of reconstruction. Here are a few:
Custom features: Can the materials in the home be repurchased at a local retail store or do they require a specific contractor or boutique store order to replace? For example, ornate moldings, custom window treatments and built in cabinetry.
Age of the home: Older homes tend to have materials that are not standardized and would require special orders, for example, doors and windows, and plaster. The older the home, the greater the cost to reproduce the unique features given the difficulty in sourcing some of the materials, as well as the specialized craftsman necessary to rebuild the home.
Historic homes: Homes on history registries or in historic districts may be subject to strict code requirements that make even partial losses costly.
Site accessibility: New homes are typically built on empty lots that large machinery can easily access. The time involved in reconstructing existing homes with landscaping, other buildings, neighboring properties, and community restrictions can increase the cost.
Time: Many homeowners want to be involved in the reconstruction process. While understandable, the time needed to research and consult eligible contracts can increase the cost.
Demolition and debris removal: After a loss there may be significant cost associated with clean up. These costs are often not considered by the policyholder.
Build codes: Homes being rebuilt must be updated to meet current building codes, which may not have been in effect when the home was built and can result in increased cost.
Economy of scale: Discounts builders may receive on materials and labor when multiple homes are built may not be given for individual builds.
Natural disaster effect: When materials and labor are scarce due to economic or weather-related conditions, cost can rise.
When should homeowners revisit their policy with an agent to make sure insurance coverage to market value is current?
Policyholders should review their coverage at the inception of the policy and at each renewal. Some policies automatically adjust Coverage A at renewal to keep up with inflation, but it’s a good idea for homeowners to review it. It’s also important to let their agents know any time they have done extensive repairs, renovations or additions. If you are concerned about your insurance coverage to market value, please contact us for a free policy review.