When shopping for homeowners’ insurance coverage, your local independent homeowners’ insurance agent will be able to explain the different options that exist in protecting your home in the case of complete destruction. A home’s market value often does not reflect the reconstruction cost of a home, due in part to the current housing market’s depressed housing prices. The market value of a home assumes the home already exists, and usually does not include the cost of the materials and labor needed if a home needs to be reconstructed. Also, if at time of replacement the number of damaged homes in your area might be so significant due to a massive storm that labor costs could skyrocket.
Home replacement coverage specifies that the replacement cost is equal to the amount of money it would take to repair, replace or rebuild a home with similar materials to the kind and quality used in the home’s original construction under normal conditions.
For a homeowner to completely cover the reconstruction of a partial loss, it is recommended that homeowners’ insure their home to at least 80 percent of the determined replacement cost. If it is not insured to this percentage, homeowners will have to pay the difference and may even be assessed a penalty on partial loss claims.
To better explain this, take a 50-year-old home that has a market value of $150,000, but was damaged by a tornado and it will cost $50,000 to repair. The homeowner finds out that the cost for complete reconstruction would be $250,000 ($100,000 over the most recent market value). Unfortunately, the homeowner did not ensure the home at the reconstruction cost, and rather ensured it at the home’s market value of $150,000. This is not 80 percent of the reconstruction price, thus the homeowner will have to pay out of pocket for the remaining amount. In this case the amount insured would be 75% of the 80% figure so the insurance company would pay 75% of the loss amount or $37,500. If the homeowner had insured the house at $200,000 (80 percent of the $250,000 reconstruction price) the insurance would have paid the full $50,000 reconstruction cost (less any deductible).
Insurance companies have to have adequate coverage limits because most losses are partial losses. In order to have the proper funding to cover partial losses they need at least 80% of the total value insured. Consider a person who insured their home for $1,000 and paid a very small premium . . . and yet expected every partial loss to be covered in full.
On the other hand, most states have valued policy laws under which total losses result in payment to the full insured amount. That person who insured their home to $1,000 would receive $1,000 less any applicable deductibles.
Replacement costs for a home take many different aspects into consideration in the calculation. After a tragic loss of a home, there are added costs for the removal of debris. Other factors that get included are the accessibility of the lot, which can cause costs for road access and off-site storage of home materials. In general, the highest costs in reconstruction come from the professional service and labor needed to construct a home. Whether it be the carpenters building the home’s walls, the electricians running the wires through the home, or the painters painting the interior, labor is expensive and is included in the insurance policy’s reconstruction cost calculations.
In general it is important for homeowners to not become victims to the market value of their home when purchasing homeowners’ insurance. A local independent homeowners’ insurance agent will be able to guide homeowners in selecting a policy that covers the complete reconstruction costs. In the event of a tragic destruction of a home, people can prepare themselves by ignoring the market value of their home and considering the reconstruction costs when purchasing their homeowners’ insurance policy.
While the majority of people want an agent involved in their purchase of insurance, many people want to see if they can save money by buying direct from the insurance company. Others want to try a direct quote to make sure the premium they’re now paying through their local agent is fair. If you want a quote for your coverage, click on the competitive quote button on the right side of this page.