Believe it or not, when you insure your home there are typically gaps between your coverage limit and what it would cost to rebuild your home as it was prior to a loss. Repairing these gaps can help protect you against unexpected out-of-pocket expenses should you need to file a claim. Let’s dive into what causes gaps and how you can close them.
Your local independent insurance agent at Bowthorpe & Associates Insurance Producers can help ensure you have coverage that is accurate and up to date with today’s construction costs.
Replacement Cost vs. Market Value
Your home’s market value and replacement cost are not the same. Market value includes factors like land, location, neighborhood, and housing demand. Your home’s replacement cost only accounts for what it would take to physically rebuild your home using similar materials.
When estimating replacement cost, construction expenses like materials and labor are only part of the equation. Don’t forget to account for permitting fees and contractor overhead. When there is high demand for construction due to recent storms or a shortage of building supplies, costs can rise quickly.
Home values in your area may not have increased but if you need to rebuild your home, costs could be much higher.
Use your policy’s dwelling coverage to insure replacement cost, not market value. Market value alone could leave you seriously underinsured.
Reasons Your Replacement Cost Gap is Increasing
Simply put, construction costs are rising. Your rebuild cost gap won’t stay the same over time. It will only get larger as prices for materials and labor increase.
Current supply shortages are causing prices to rise on many building materials. Additionally, delivery can be delayed due to high demand and shortages in the supply chain.
Labor shortages are also becoming an issue. Construction workers are in high demand and command higher wages.
Many areas also have updated building codes since your home was built. Newer homes are required to have additional fire safety measures, more expensive roofing materials and upgraded HVAC systems which increase overall costs.
When was the last time you increased your homeowners insurance coverage?
Why Underinsurance Can Be a Problem
Underinsurance isn’t just about receiving a smaller payout from your insurer. There can be penalties built into your insurance policy that further reduce what you receive.
Some insurance companies include what is called a coinsurance clause in your policy. It requires you to insure your home above a certain percentage of it’s replacement cost or face a penalty on claims.
Say your home should cost $200,000 to rebuild. Your policy requires you to insure your home at 80% of replacement cost to avoid coinsurance penalties. You chose the wrong coverage amount and insured your home for $160,000. A covered storm causes $100,000 in damage to your home.
Because you were underinsured by not meeting the 80% requirement, your insurer may impose a penalty. You may only receive $80,000 of the $100,000 needed to repair your home. Now you are $20,000 short.
If it was a total loss, and your policy limit is $160,000, you may owe $40,000 out of pocket to your insurance company to fully rebuild your home.
Certain coverages can help protect you from rebuilding cost gaps.
An endorsement known as extended replacement cost can help. As the name implies, it will extend your insurance policy’s limit by a certain percentage if your home suffers a covered loss and it costs more than your standard coverage amount to rebuild.
Guaranteed replacement cost coverage can help cover the entire cost to rebuild your home even if it exceeds your policy limit. Not all insurance companies offer this.
Inflation guard is an important coverage to consider as well. It automatically increases your coverage each year to help keep up with construction cost increases.
Check with your insurance agent to see if your policy includes ordinance or law coverage. This can help pay for required building upgrades to meet current building codes.
Site and Cleanup Costs
We aren’t talking about debris from water damage or holes in your walls. Before a contractor can rebuild your home they must first tear down what’s already there.
Also referred to as cleanup costs, debris removal, site preparation and even disposal fees can add up quickly. Some policies limit how much they’ll pay or classify cleanup costs differently.
Don’t assume your insurance will cover these costs. You may need to pay them before the rebuilding process can start.
Keep Accurate Valuations
The easiest way to avoid rebuilding cost gaps is to ensure your home is properly valued.
Get a professional replacement cost valuation of your home. If you’ve made any major improvements to your home like a kitchen remodel, room additions or upgrades be sure to factor those in as well. Even if you haven’t made major changes to your home, prices can still increase.
You can always get estimates from local contractors to compare prices. Having an accurate idea of rebuilding costs will help you shop around and ensure you have the proper amount of coverage.
Ask your insurance agent about keeping a file with home improvements. Include expenses such as receipts, permits and photos of the work done. It can help during both policy renewals and if you need to file a claim.
Summary
Rebuilding cost gaps are sneaky because they can happen slowly over time. Once you have a significant gap between your policy limits and what it would cost to rebuild your home, you could be in for some unexpected expenses.
Not understanding the difference between market value and replacement cost can cause gaps. Forgetting to update your coverage as prices change can create gaps. You can protect yourself from rebuilding cost gaps by making sure you have the right coverages in place.
Bowthorpe & Associates Insurance Producers can help you identify any gaps and select the coverage that’s right for you.
Frequently Asked Questions
Q: How do I know if my homeowners insurance covers my full rebuild costs?
A: Get a professional replacement cost estimate from a contractor or reputable company then compare that to your policy’s dwelling coverage limit. If your limit is lower, you probably have a gap.
Q: Why is it that my home’s cost to rebuild is higher than what it’s worth?
A: Remember that your home’s market value includes your land. It also factors in location and neighborhood housing demand. Replacement cost does not account for these things.
Q: How often should I update my homeowners insurance?
A: We recommend you review your homeowners insurance policy yearly. Be sure to increase your coverage if your local construction costs go up.
Q: What is extended replacement cost?
A: Extended replacement cost is an endorsement that you can add to your insurance policy that will increase your coverage above your set limit.
Q: Does homeowners insurance cover building code upgrades?
A: Usually not, but you can add ordinance or law coverage to your policy.