“Why do insurance companies say my house is worth more than what I paid for it? I know I can replace it for less. The price I paid includes land, yet the insurer says it is more valuable.” All this makes no sense to the consumer, most people just know that they need homeowners insurance. But it is very important that your home be insured to its accurate replacement value. It’s a good idea to re-evaluate your home’s replacement cost every few years to reflect any changes in the cost of construction, building materials and labor. In addition, new replacement cost figures should be established after any renovations, upgrades or alterations to your home.
The purpose of Insurance to Value (ITV) is to determine what the “replacement” value is, if your home was severely damaged or destroyed. This value is not what someone would pay if your home was listed for sale or built new, but the represents costs such as materials, labor and equipment that an insurance claim would incur to “replace” the home. Remember an insurance company will likely pay a premium to have your home replaced, as the work is typically expedited.
“Why Should I Insure to Value?”
“Guaranteed Replacement Cost Advantage*
Most comprehensive homeowners’ Insurance policies guarantee the replacement of your home and contents in the event of a loss. If you have this guarantee, it will make up a shortfall in the event that the replacement cost of your home is underestimated. This is of great benefit for consumers because it provides assurance that if the cost to replace your home at time of loss is more than the home’s stated value on the policy, the insurance company will still replace it at no additional cost to the owner. However, insurance companies need to keep the insurance valuations in line with construction market realities to be able to continue to provide Guaranteed Replacement Cost coverage over the long term.
Avoiding any Coinsurance Penalties
Your home insurance policy may also contain a “co-insurance” clause. Common co-insurance limits are 80%, 90% or 100%. This is the percentage of the replacement value that your property must be insured to in order to be fully reimbursed for a loss. If you don’t insure to the minimum value determined by your broker by the “Replacement Cost Valuation”, you may be penalized in the event of a claim. Essentially, this means that if you insure your home for less than the determined “Replacement Cost” amount, then you might only get a portion of your claim paid.
“The Insurance Valuation provided by my Broker was Higher than my Brand New Home Cost to Build. Why is that?”
Regardless of a home’s age, when rebuilding a home with severe damage, there are costs associated with reconstruction that are not part of the original construction costs. As a result, these additional reconstruction costs need to be considered when determining the amount of insurance needed for your home.
- ECONOMY OF SCALE
A reconstruction firm purchases in smaller quantities than a general contractor and does not receive volume discounts from building suppliers. These firms have to factor in their profit and overhead (20%-30%) based on building one home as opposed to many. These extra costs are all part of the cost of reconstruction.
- COSTS OF DEMOLITION AND DEBRIS REMOVAL
Before any reconstruction can begin on an existing home, debris from the damages must be removed. When removing debris, reconstruction firms must work without damaging existing driveways, landscaping, utilities, sewer systems and any undamaged portion of the house that may be remaining. The time and expense to work around these obstacles add to the cost of the overall project. The site may also have to be extensively cleaned as the soil may be contaminated.
- CURRENT BUILDING CODES
When rebuilding or restoring a home, you may need to meet the newer and more demanding building codes. Building code changes can add thousands of dollars to the cost of restoring a damaged home.
- SPECIAL RESTORATION PROCEDURES
A full assessment of the home has to be made for structural integrity. Estimates from restoration firms have to be received, evaluated, and awarded. Restoration firms employ specialists who are skilled in handling hazardous waste and operating in adverse working conditions. The site also has to be secured and damage to neighbouring properties assessed. Specialized machinery will likely be required to work in a built-up, mature neighbourhood or site.
- COSTS DUE TO REPLACEMENT WITH LIKE KIND
Reconstruction includes the cost to re-construct, at current prices, an exact replica of your dwelling, using like kind and quality materials particular to your home. Older homes are more difficult to match and results in extra costs. Rebuilding older homes often require many independent specialists which can certainly affect the final price.
- HIGHER LABOUR COST
A Brokers’ commitment to you is getting you back into your home as soon as possible. This heightened “urgency” usually costs more in materials, delivery fees and contractor fees. When a builder has several houses under construction work can be scheduled for the most efficient use of carpenters, electricians, etc. When only one home is being rebuilt, the same kind of efficient scheduling is seldom possible.
- ROOF DOWN VERSUS FOUNDATION UP
New construction begins at the foundation and builds upwards. Repairing a house that is not totally destroyed often involves removing the roof and rebuilding from the top down, a far more time-consuming and labor intensive process.
“REPLACEMENT VS. MARKET VALUE – WHY ISN’T IT THE SAME?”
Replacement cost is very different from market value, actual cash value or tax assessment value. Insurance premiums are not based on the current resale value of your home, but on the cost to replace it. Market value is based on a number of factors that have no direct association to your home’s replacement cost. Some of those factors include desirability (location), land value and market value of surrounding homes. Replacement cost factors, on the other hand, can include material costs, fuel and energy costs, the cost and availability of skilled labor; debris removal, site
THE SALES PITCH
Now that you understand where the insurance values are coming from, why not give Crosbie Job a chance to quote on your homeowners insurance. Feel free to contact one of our insurance professionals for a free evaluation of your home insurance policy. When you insure with Crosbie Job it’s our job to get you the best coverage at the best rate. We work with many different insurers to place your business. Our insurance is based on Strength and Experience. We’ve Got You Covered. Don’t waste a moment leaving your property and/or contents unprotected. The consequences of damage or theft are unthinkable. Instead, contact us for a free, fast and confidential Homeowners Insurance quote.