Wisdom from our industry experts and our SilverLink magazine.


Calculating Replacement Cost Coverage

When determining a home’s value, homeowners tend to think about “market value” or what it might sell for. This number can fluctuate considerably and is primarily dependent on what buyers believe a home is worth. When insurance carriers determine a home’s value, they look at the numbers from a much different angle. Replacement cost coverage is based on the total cost of reconstruction. This number is usually steadier than a home’s market value, with a typical annual increase of 4% to 5%.

Many factors are weighed during the underwriting process before arriving at the “dwelling value” on a homeowners policy. In the event of a total loss, homeowners can experience enormous financial stress if their property is underinsured. Insurance professionals follow a rigorous process to ensure that reconstruction cost estimates are as accurate as possible. To get a better understanding, let’s take a closer look at how replacement cost coverage is calculated.replacement cost coverage

Construction Costs
When configuring replacement cost coverage, insurance professionals research the cost of labor and materials, craftsmanship and expedited reconstruction. Building materials typically become more expensive each year. This is only exacerbated by catastrophic events such as hurricanes, wildfires, tornadoes and hail storms. What’s more, contractors can add surcharges during times of high demand.

The insurance carrier has a responsibility to replace your home with the same quality of materials and craftsmanship. For custom homes, the cost can go up considerably since they often involve unique features. Carriers are generally motivated to rebuild homes as soon as possible, so they may pay a premium price for contractors.

Cleanup and Remediation
The cost of demolition or debris removal is another factor that can considerably increase the cost of reconstruction. This is especially true after a fire. The home site may need extensive cleaning to decontaminate the soil. There could also be damage to the foundation needing repair. Oftentimes, substantial work is required before hammering the first nail in a home rebuild.

Rebuild vs. New Build
When calculating replacement cost coverage, it’s important to remember that the cost to rebuild a home is usually higher than a new build. This is mainly due to economies of scale. When a contractor has many homes under construction at the same time, materials such as framing lumber, plumbing fixtures and bathtubs can be purchased in bulk. Suppliers usually compete for business and offer discounts for large orders. However, buying just one bathtub or plumbing fixture (that must match one that’s been destroyed) nearly always costs more than if it had been part of a larger order. Apply this to every item needed for the rebuild and costs can soar thousands of dollars higher than the cost for comparable new construction.

Access to the worksite, building code changes and special features (i.e., custom ironwork, marble flooring) can also drive up the cost. These all impact reconstruction expenses and play a big role in placing replacement cost coverage.

Prepare for the Worst
Insurance providers do not take the insured value of your home lightly. Rebuilding your home will likely cost more than its market value or similar new construction, so replacement cost coverage is an important part of your asset protection plan. When thinking of your home value, consider all the factors that go into a rebuild. We encourage you to work with your insurance professional to ensure this number is continually updated and accurate. Should you experience the misfortune of a total home loss, you will be glad your replacement cost coverage is ready to respond.

This article originally appeared in the 2018 | ISSUE THREE of the SilverLink magazine, under the title “ Ready to Rebuild? Calculating Replacement Cost Coverage.” To receive a complimentary subscription to the SilverLink magazine, sign up here.

Print This   Share This
Comments... Hide