The market values of homes are on the increase again. Thank goodness! Considerations such as the economy, interest rates and supply & demand have a huge impact on how much a buyer is willing to pay for a home. So what does that have to do with determining how much you should be insuring the replacement cost of your home for? Really- very little! Once you realize that "market value" and "replacement value" are like apples and oranges, understanding what goes into calculating the replacement cost of your home will make a little more sense. So what affects "replacement value?"
- Cost of Material and Labor. Building materials and cost of labor fluctuate according to many factors. Did you know that the cost of building materials was deeply affected by storms such as Katrina and Hurricane Andrew? In the recent economy, labor prices have been a bit lower but the cost of materials continues to rise.
- Age of Home and Building Quality. Ever heard the phrase- they don't make things like they used to? Older homes had different building materials and techniques utilized such as lathe and plaster walls instead of drywall, 2"X6" lumber instead of 2"X4", and many other differences that can significantly impact how much it costs to "replace" it. Please note- insurance contracts vary- if you think in the case of a large loss, your home will be re-built to the same standards you currently have; be sure to ask your agent as most insurance contracts will rebuild using currently accepted methods of construction.
- Change in Building Codes. You don't have to have a very old house to be affected by the constantly changing building codes implemented by local government. They may require for example that if a fire damages a certain percentage of your home; you must add a sprinkler system that you did not have before. You need to have enough "Law or Ordinance" coverage to comply with these requirements.
- Location, Location, Location. Whereas "market value" is affected by the size of the lot and view; replacement cost does not include land so the main location consideration is accessibility and slope of the land. This affects the ease to rebuild and therefore the cost. So for example, if you live on the side of a hill, the cost to rebuild will be much higher than if you are located on flat ground.
All of this can be very confusing for anyone trying to properly insure his or her home. When market values are high such as what we experienced in the early 2000's; replacement cost seemed for most people to be low. (My home is worth more than that!) But- when market values are low which we recently experienced after late 2007, the cost to rebuild can be much higher than the market value of your home including land! (My house isn't worth that!)
Insurance companies use specialized vendors to determine the replacement cost of a home. These vendors track building materials costs and labor costs by zip code and update them multiple times per year to more accurately assess the replacement value of a home. Your agent uses these tools to determine the replacement cost. The more detailed information they have on the type of countertops, floor coverings, number of fireplaces, etc.; the more accurate the calculation will be. If you haven't had your agent run that calculation in several years, now is a good time to make sure you have proper coverage.
Sharon L. Graeter, CPCU is Co-Founder and Director of Development for West Connect Insurance Solutions. She has been in the Insurance Industry for 35 years and is a contract expert. If you would like to receive her e newsletter, please sign up at http://www.sharongraeter.com
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