01/16/2025
UNDERSTANDING REPLACEMENT COST
The insurance story of the year is, of course, the devastating wildfires wreaking havoc in Los Angeles. How quickly we forget about North Carolina and Florida.
Unfortunately, what many are finding out as the smoke clears, is that their home’s replacement cost (Coverage A-Dwelling) was understated/undervalued. This is not unique to this catastrophe; it happens every day in every part of the country. They are finding out, the hard way, what replacement cost really means.
It does not mean “the assessed value” for tax purposes.
It does not mean “the market value” for selling or purchasing purposes.
It does not mean “the loan value” what you may owe on it.
It means, what is the cost to rebuild your home, in the same footprint, with the same features and finishes in today’s dollars. What many insureds don’t know is this includes: demolition and debris removal, Architect and Design Fees, permits and inspections, Builder’s Profit and of course, the cost of the materials and the cost of labor.
So, how does this happen? It can happen any number of ways, either market driven, industry driven or consumer driven.
For instance, a market driven scenario might be recessed region where home values are slightly lower than the norm, but the building costs are inflated, or in a value inflated region where large building companies have developed, and their cost to build 300 homes is significantly lower due to the economies of scale, but the cost to rebuild home does not reap the same bulk purchasing benefits. i.e. A large residential builder might be able to build 300 homes for $260 a square foot, but a single build in the same footprint might cost 15-20% more.
In an industry driven scenario, a thorough valuation may not have been done, or worse yet, done but manipulated to yield a lower replacement cost, thus generating a lower premium, and leveraged to close more business. Then year after year, as inflationary costs are added, they are added and compounded on an insufficient number. This is good for the carrier, (less exposure) good for the producer, (more commission) but awful for the homeowner (financial hardship when the worst happens). It is trading the short-term benefit of saving a few hundred, or even a thousand dollars for the security of having the necessary resources to rebuild when the worst happens, which will inevitably cost tens to hundreds of thousands of dollars.
In a consumer driven scenario, maybe a thorough valuation was done by a licensed and ethical agent, but it costs more than the coverage they have in hand, so they dismiss it
1) because they think the carrier is trying to gouge them, or
2) they have the means to self-insure whatever exposure they are open to (not so common) or
3) they simply feel like they cannot afford it, think “my house isn’t worth that much” and it “would never happen to me anyway”.
The third is probably the most common scenario when consumers are shopping; they have their Declaration page in hand and dismiss any proposal with an increased premium over their current policy (that has an insufficient valuation in it), even though that higher premium is offering the appropriate replacement protection.
My advice, accept that it can happen to you; it happens as I said, every day all over the country!
Do yourself a favor and have a licensed insurance professional run a replacement cost valuation on your home and ask to see it and review it for accuracy, in an ideal scenario the homeowner and agent are partners trying to achieve the same goal-protecting what you have and averting a financial hardship when the worst happens.
The tools we use are very sophisticated and accurate with localized and regionalized costs built in; if the information that is input is correct, the corresponding valuation will be equally as accurate, and you might get an eye opener.
Contact us-we can help!
