Understanding Replacement Cost for your Home

Posted on August 20, 2020

Most homeowners’ insurance policies include a feature to automatically increase the building limit each year. This can ensure that your policy keeps up with inflationary construction costs such as labor and materials.

By insuring your home at 100% of reconstruction value you are assured of being able to rebuild your home if you have a small or catastrophic loss.

The market value, assessed value, or actual cash value of your home are not used to calculate your insurance premium.  We focus on the Reconstruction Cost to put you back into the same place you were before the loss.

What could happen if you are underinsured?

• You could end up without enough money to rebuild your home. Construction costs add up quickly when you think about all that goes into your home including appliances, cabinets, baths, windows/doors, foundation, flooring, roofing, interior and exterior walls and siding, heat and air conditioning, electricity and plumbing.

For example: A severe storm causes damage to a large number of homes in the area and completely destroys your home.  Construction costs skyrocket because of the regional demand.  The insurance company determines that your home is only insured to 90% of the Reconstruction Cost.  The additional amount over that dwelling limit would then be your out of pocket cost.  If you have 100% of the Reconstruction Cost and a guaranteed replacement cost endorsement, the company will actually pay above the policy limit if needed to rebuild your home.

• You could become a co-insurer of your home. All homeowner policies have language in them penalizing you for underinsuring your home which could result in you helping to cover the expense of a loss.

For example: A storm causes $100,000 worth of damage.  The insurance company calculates your home is only insured to 75% of the reconstruction cost.  They would only pay out $75,000 for the claim (75%) leaving you with a $25,000 gap in coverage.

While annual inflationary increases to your dwelling limit coverage will cause a very slight increase in your premium, it helps to ensure you have enough coverage to repair your home in the event of a tragic loss.

Aronson Insurance regularly reviews studies about construction costs and we use replacement cost estimating software to help calculate current replacement costs.  One of our carriers, Chubb, annually calculates their Construction Cost Adjustment Factor (CCAF) using a number of different industry resources combined with their own actual claims costs and trends.  Factors that contribute to this factor are skilled and common labor costs along with construction materials.  They found an increase labor costs of 1.8% for skilled labor and 1.3% for common labor in the last year.  Residential construction materials such as cement and concrete block, lumber, and asphalt shingle products have increased while metal products are down.

Verisk and Insurance Services Office (ISO) are industry leaders who help develop tools and methods to help the insurance industry understand and manage risk for their clients.  Their recent study showed while US reconstruction costs appear to be down slightly from the 5.0% seen April 2019 to April 2020, they were still up 4.8% from July 2019 to July 2020.  Massachusetts fell in the middle range showing an increase of 4.56%-4.85%.

While calculating reconstruction cost and keeping your policy 100% Insured-To-Value aren’t exact sciences, they are important considerations when writing a new policy or looking at your renewal policy.

At Aronson Insurance, we insure thousands of homes of all sizes in Massachusetts and around the country.  Our agents will walk you through the insurance cost estimator we use to determine the right reconstruction cost for your home and help you better understand your coverage. If you’re interested in insuring your home or reviewing your homeowner’s insurance policy, contact us today at 781-444-3050.