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January 5th, 2018
With the recent unfortunate wildfire devastation, and subsequent mudslide events causing huge losses across the state, it’s more timely than ever to understand why personal insurance dwelling replacement cost limits don’t match home market values.
The biggest difference is land. Replacement cost is the estimated cost to rebuild a home at current prices. Market value is the estimated price which your home would sell on the open market, which would include the value of the land. Replacement cost does not include land value.
Homeowner policies all begin with the dwelling limit and afford other property limits based on the dwelling replacement cost limit. The dwelling limit on a homeowners’ policy is an insurance company’s estimate on what it would cost them to rebuild a home.
Rebuilding includes unique features, professional fees, and designer finishes. Each carrier will come in with a slightly different estimate, but be wary of carriers who routinely under-evaluate their estimates in order to bind policies based on price alone. A difference of more than 10% between carriers should generate questions as to factors going into a low dwelling replacement cost limit. A replacement cost estimator should always be provided for your review unless your carrier is providing a detailed inspection.
Many factors go into home reconstruction after a loss. A top one to consider is the foundation. Some contractors routinely exclude foundation costs in their estimates because they do not believe anything will happen to the foundation. However, those who’ve experienced a fire will tell you how hard it is to remove the smell of smoke from everything, including the foundation, so always make sure the foundation is included. Adjusters also comment on the fact that most families tend to change their plans slightly when having to rebuild from the ground up, which again means the foundation is very important.
Overhead and profit is also a factor because it may be more than a contractor is currently charging. Many carriers will include 20% in their calculation to make sure you are rebuilding with the highest quality of work. Architect and engineering fees are also significantly higher in the most desirable areas to live. Designer name brand items and interior designer fees also go into the calculation and are often skimmed over by contractors because they don’t spend the time researching costs for items such as unique plumbing fixtures.
Another factor is location, areas subject to flood, tornadoes, hurricanes, and earthquakes will be higher due to building code constantly changing to make sure new structures can withstand these increasing catastrophic events. With the recent wildfires and hurricanes, many families are also dealing with supply shortages of basic building materials due to high demand.
Additional factors influencing reconstruction costs are single home vs. development. A single home is more costly than building several new homes simultaneously as a developer can cut costs by ordering in bulk and create efficiencies with labor when building more than one home. Site and staging issues may also be an issue for single homes if materials and supplies need to be trucked in each day. Noise and other construction issues may lengthen construction to minimize the impact on other residents of a neighborhood.
Environmental issues are also becoming more of a consideration if materials that were readily available when the home was originally built are not available today, or are now more expensive due to new restrictions on wood harvesting or laws protecting endangered species of trees.
Once you understand the factors that go into calculating a dwelling replacement cost limit, you will see the value in making sure your limit is accurate.
Keeping up with construction cost is also important so renewal inflation factors are included each year.
There are many ways to save premium dollars on homeowners’ policies with the correct dwelling replacement cost.
Visit our Private Client site for additional information on our services.