Do you have Adequate Homeowners Insurance Coverage?

Insurance rates for homeowner policies are rising faster than they have in years. Major storms and social inflation are two factors. The impact of inflation on the cost to reconstruct a dwelling is as well. Building material and labor costs have seen double-digit percentage increases yearly. Permitting and architect fees have also seen significant increases. 

As a homeowner and an insurance policyholder, it is always good to make sure you have adequate coverage. Adequate coverage begins with estimating the cost to reconstruct your property. Reconstruction cost is the amount to rebuild the dwelling on the property. The cost to reconstruct a dwelling is different than the estimated sale price, or market value. Things like the age of the home, size of the home, home style, type of foundation, and materials used play essential factors in estimating this amount. 

A good reconstruction cost estimate considers the following.

1. Cost of Materials - Questions to answer include, but are not limited to, are the materials uniquely customized in any way? Was the home built prior to 1940 and therefore contains materials like horsehair plaster and moldings unique to this period?
2. Cost of Labor - The cost for contractors and subcontractors matters. When availability is tight, and demand is high costs here can skyrocket.
3. Permitting and Architect Fees - While not as pronounced as material and labor costs, these need accounting for when estimating the value to replace your dwelling.
4. Debris Removal Fees – In the event of a loss to your dwelling, debris removal is covered and needs estimating and be included in the final amount.

Determining the estimate can be done by multiplying the square foot of the living area for a property by the average cost per square foot to rebuild. This can be challenging, as it relies on constantly knowing the average cost where you live. That average cost can frequently change. 

However, there are vendors that constantly survey the marketplace and index reconstruction costs, thus allowing the building value determined to be more accurate. Instead of multiplying square feet by an average cost, insurance providers offer this to their agents to ensure accuracy. Insurance providers also, at times, inspect dwellings to determine the estimated reconstruction value. 

Once a building reconstruction cost is determined there is insurance coverage that protects you against the impact of inflation for building materials, removal costs, fees, and labor. These are available and commonly applied to coverage offered by your agent. 

A standard homeowner insurance policy provides coverage up to the insurance policy limit for the dwelling, provided the cost to reconstruct is at least a certain percentage of the policy limit (usually 80%). As a precaution against a penalty for coverage that is too low, agents can offer Extended Replacement Cost or Guaranteed Replacement Cost coverage. Provided your home is properly insured to value, these amendments to a policy increase the building amount available in the event of a loss above and beyond the listed amount. Extended Replacement Cost is available in set percentages, usually 25% or 50%. Guaranteed Replacement Cost has no percentage limit. Also, there is Inflation Guard coverage, which is provided at a pro-rated set percentage of your building’s value over the policy term.

An accurate estimate also relies on the homeowner. When an agent provides you with an estimate to reconstruct your home, make sure the information is accurate. Initial information is often pulled from public records, like a property assessment card. If something looks off, let your agent know. Also, if in the history of owning your home, you have had any upgrades to appliances, bathroom fixtures, windows, moldings, rooms converted for other usages, basement’s finished, or additions built onto your home, make certain your agent knows.

To cushion the impact of rate increases we recommend that you talk with your agent. Independent Agents represent multiple insurance providers that can offer not only the best price but also the coverage options that make the most sense. For example, if there are alarms in your home, make sure you are getting the proper discount for the system you use. Also, if you can absorb a higher out-of-pocket expense in the event of a loss, ask about a higher deductible. And ask about bundling your home insurance with other things you need to insure, like your automobiles. 

Your home is your biggest investment. Premiums to insure your home are going up for many reasons. Inflation for the things that make up reconstructing your dwelling is of them. Make sure you are properly valued. Work with your agent to determine the proper coverage you need at a fair price.