Our Thoughts

How Do I Know if I Have Sufficient Insurance to Rebuild My Home?

By: guest contributor, Mitch Freedman (Lane McVicker Insurance)

To accurately estimate the insurance necessary to rebuild your home, plan for the worst. That is, assume a total loss of your home from a catastrophic event such as a Hurricane Sandy or an unstoppable fire. Next, do not assume your existing insurance policy will cover a ground-up reconstruction, particularly for a higher-value home. To make certain you are not underinsured, there are other assumptions to avoid.

Given market conditions, do not assume the valuation of your home on the real estate market is also the price of rebuilding it. Over the last five to six years, market valuations have tumbled downward. The after-effects of that decline still linger in the form of a market that is recovering, though at a less-than-robust pace. In contrast, replacement costs between 2007 and 2009 only flattened, and by 2010 were rising anywhere from 2 percent to 6 or even 10 percent annually. At the close of the second quarter of 2013, according to Insurance Company Quarterly Review, those costs had increased 1.9 percent versus the same period in 2012.

In short, these are two lines on a graph going in opposite directions. Valuations have gone down and are recovering only slowly, while the cost of construction has never gone down and continues steadily upward. Conclusion: The market value of your home will most likely fall short of what it would take to rebuild it. Of course, large property or an attractive location, like the seashore, may skew the market value of a home. But it is still smart to calculate the accurate amount it would take to replace only the house.

Do not assume replacement formulas, particularly those used for non-custom homes, will reflect your rebuilding tab. The re-creation of any home, particularly one with special materials and architectural distinction, is, in construction parlance, a “one-off” — meaning that replacing your one home eliminates any economy of scale that contractors realize in new multiple-dwelling construction. So this factor must be figured into the cost, along with myriad other items, from architect fees to the cost of a new foundation.

One way to obtain a rough estimate of rebuilding costs is to combine square footage with the date the house was built, what it is made of and its location. Based on these factors and current local construction costs, you can obtain a reliable figure. That said, if you insure your home with carriers accustomed to covering houses with above-average market values, they will be equipped to produce an accurate rebuild cost for a house like yours. Most likely, they will also regularly reappraise your house, especially to account for any renovations or additions that need replacing.

As a general rule, most companies automatically update your valuation limit with an annual adjustment at renewal that is typically in the 2–8 percent range. As to guaranteeing replacement costs, a typical homeowner policy stops paying your rebuild costs once your valuation limit is used up. However, a superior policy from a carrier serving high net worth clients usually continues to pay, even when costs go over and above your valuation limit. Having that guarantee will boost your premium a bit, but it is better than being out, say, a half million dollars in replacement costs.

Accurately calculating the cost to rebuild your house and then insuring it for that amount not only results in a new home that comes as close as possible to the original, but also helps lessen the impact that the loss of a home has on every member of your family.