Let’s talk about replacement cost. What does that mean? If there was a loss what would the cost be to rebuild your home, to replace it? This amount is usually very different from a tax valuation or the market value; causing confusion for home buyers when obtaining a comprehensive homeowners policy. We’ll break it down in the next few paragraphs.
The Difference Between Market Value and Replacement Cost
Market value is the price that you paid for your house or that which could be derived from current sale of home. It includes things, such as the land’s value, and is affected by the real estate market in that location.
Replacement cost is the price or cost it will take to remove debris and rebuild your home in the same spot, same size and same quality of construction, at today’s costs.
For example, a home purchased in a rural neighborhood, may have a market value of $185,000. The exact house, located in a coastal community, may have a market price of $385,000; however, the cost to rebuild the house after a loss would be the same in either location. The insurance company is looking to insure the home for the full replacement value, not the current market value. Remember, they are going to pay to build you a new home, not buy one for you down the street.
How Do We Determine Replacement Cost?
Each insurance carrier uses their own replacement cost estimator, a software program they have designed or have purchased. We supply the insurance carrier with data we collect from you in the quoting/application process. Often this is used in conjunction with an inspection of the home by a licensed appraiser, to make sure everything is accurately covered in the cost estimate.
At Cheney, we begin our homeowner quotes by having the customer fill out an extensive questionnaire. The more information we are able to gather prior to submitting a quote the more accurate the quote will be and the less ‘hidden surprises’ – premiums that significantly change due to undisclosed information regarding the property to be insured.
Once replacement cost is set and the limits established on your homeowner policy, your policy will be reviewed each year and typically increased 3-4% due to inflation of materials and labor costs.
Many Factors Affect Replacement Cost
This is by no means an exhaustive list, but here are five factors:
1. New building codes
This primarily affects older homes. While homeowners are usually not required to upgrade their homes every time the building codes change, if your home is destroyed and needs to be rebuilt, the current building codes will apply.
2. Remodeled kitchens
Kitchen renovations change home values. Custom quartz or granite countertops, new cabinetry, double tub stainless steel sinks, resilient flooring—whatever you’ve added, adjust your homeowner’s insurance to match the increase in your home’s value.
3. Additional rooms and structures
Perhaps your growing family motivated you to finish your attic or basement to add bedroom space. Or maybe you are taking advantage of low interest rates to add the garage, workshop or screened-in porch that you have always wanted. New rooms add value, and unless you update your homeowner’s insurance to account for these additions, you risk having to pay for them again. No one wants that responsibility.
4. Rising prices of building materials and construction costs
Bricks, timber and stone cost more over time, especially if a natural disaster has affected your area, stirring up demand, and lowering supply. Disruption in supply chains, like what we experienced from the 2020 global pandemic, may also have an overall impact on material costs. In addition to building materials, workers’ wages may be affected by labor shortages, increasing construction costs overall. All these factors go into the data analysis that produce the cost estimators that insurance companies use to ensure that are insuring to value.
5. Old and hard-to-replace features
Older homes may have many architectural features that are expensive to replace, such as arched windows, oversized doors, and elegant ceiling molds. If your house has unique features, especially ones that require specialized craftsmanship, this will affect replacement value. Perhaps you built a new home and incorporated many architectural salvage elements, this also affects replacement cost.
The Cheney Difference
We’d like to reach out ahead of your policy renewal to check in to make sure any improvements or significant changes to your home are reflected in your coverages. Significant changes may be purchases made or gifts received that are not fully covered with a regular homeowner policy and could be scheduled for full protection.
It is also a good time to review if you are eligible for any discounts or special endorsements you may not be receiving.
However, if at anytime you have questions about your homeowner policy, please give us a call. We will make sure you have the coverage you need for the best value.