Homeowners Insurance and Replacement Cost

February 23, 2017

When you purchase homeowners insurance, one of the factors in your policy is the replacement cost – what the insurance company will pay to rebuild your home if it is completely destroyed. What you may not know is that your insurer may not pay if your insurance isn’t equal to at least 80% of that cost.

Your insurance company will use a combination of the information provided on your home appraisal and current market research in order to determine what your replacement cost is, but there are a few other things you should know about this part of your insurance:

  1. Costs Change: As the cost of construction supplies fluctuates, so, too does the cost of rebuilding your home. For this reason, it’s a good idea to request an updated estimate every three or four years, and adjust your coverage if necessary.
  2. Rebuilding is not the Same as Buying New: Don’t assume that the going price of new homes in your neighborhood is a good indicator of the cost to rebuild a home. There are several factors that go into rebuilding costs, including the existing infrastructure, the cost of supplies and equipment, and whether or not there are government subsidies in play.
  3. Insurers Aren’t Always Right: While the analysts at insurance companies are often pretty rigid when it comes to replacement cost estimates, they’re not always right. If your house has custom features or other characteristics that make it unique, do your own research and present your findings to your insurer. They may increase their estimate.
  4. Older Homes Cost More: Most of the time, older houses cost more to rebuild than newer ones, especially if they’re over fifty years old. Partly, this is because of changes in construction materials, but also it’s because older homes tend to have a lot more customization. To offset this expense, you may be able to use a “functional replacement cost” endorsement, which will specify that your home will be rebuilt to the specifications of a newer home.

The bottom line is this: it costs money to rebuild a home, and you want to make sure that money comes from your insurance company, and not your pocket. If you believe the insurer is underestimating the cost to replace your home, you have to get involved.