Keep Your Castle Protected

“If you’re not getting better, you’re getting worse.” It’s hard to say who was first to utter that phrase but you hear it most used in sports banter. It is a round-about way to say that we’re not living in a static world – everything changes and the same is true for factors affecting the costs to replace your home. Your policy might have been up to the task of covering the expense of rebuilding your home at one time. But, chances are, it may no longer afford enough coverage unless it has been changed to reflect the reality of replacement cost. Insurance industry experts and others routinely estimate that up to two-thirds of homes in the U.S. are under insured. For most of us, checking our home’s replacement cost periodically is a good idea.

Before we discuss what affects replacement cost, we should clear up a common confusion – the difference between your home’s market value and its replacement cost. Market value is simply the price you might get if you sold your home. Replacement cost is what it would take to rebuild your home. Both measures are related; for instance, an increase in the cost of building materials would cause both market values and replacement costs to go up. However, the two values often diverge. For instance, in a high demand resort area, market value would reflect the law of supply and demand and a house which might be built for $300,000 somewhere else might sell for well in excess of that amount. Conversely, in a down real estate market, low demand may cause market value of a home to fall below the cost to rebuild.

There are many factors affecting replacement cost and we’ll start with the obvious: Inflation. Most homeowner policies provide an automatic annual adjustment for inflation. If not, you may want to see if it can be included. But sometimes inflationary pressures are sudden and dramatic. Building material prices can be affected by shortages due to turmoil in countries that produce those materials or an increase in overall world demand. Homeowner insurance adjustments that happen at 12 month intervals can miss some of these dramatic inflationary events.

Just as obvious as inflation but often overlooked are improvements we make to our home. Upgrades are undertaken for many reasons: improving wiring, plumbing or heating and air conditioning systems; adding rooms for more space or remodeling and upgrading a kitchen or bathroom. In 2003, homeowners spent $176 billion on repairs and remodeling, according to a report from Harvard University’s Joint Center for Housing Studies. The report also noted that, between the years 1984 and 1999, 39 percent of homeowners added a room of some type to their home; the average home size during the same period increased to 1,700 square feet from 1,580. In most of these situations, if the homeowner didn’t tell their insurance agent about the improvements, the increased home value wouldn’t be protected.

There are some less obvious factors affecting a home’s replacement cost. For instance, it costs less to build a new home on an empty lot than to rebuild on an established site. Often, on an established home site, debris has to be removed and disposed of before any rebuilding can take place. Sometimes debris can be hazardous, as with older building materials like asbestos, and will require extra cost to remove and dispose of. Debris removal coverage is typically included in a homeowner policy with a separate limit for that purpose. Once that limit amount is used up, though, policy limits for the home will need to be used for that cost and this will reduce the amount of protection otherwise available for rebuilding.

Similarly, building codes and requirements may have changed since your home was built or last updated. Even if a house is only a few years old, new ordinances may have been put in place addressing wiring, ability to withstand damaging wind or other construction and safety requirements. Any repairs made to your home will need to comply with these new requirements and that may add cost. There is also a coverage contained in most homeowner policies called Ordinance and Law that is meant to protect you in these situations. This coverage comes with a separate limit, and as with Debris Removal, once the limit is used up, additional costs will be paid out of the amount your home is insured for. Ordinance and Law limits can often be increased for a small premium increase. Depending on the age of your home and the number of code changes that have taken place in your community, increasing this limit might be a good idea.

Because your home is your castle you will want to have your home insurance protection evaluated annually. We have a variety of tools on our website to help make that convenient for you. Complete the Homeowners Replacement Cost Questionnaire and we can produce a replacement cost estimate for you. The Annual Review Wizard, Personal Risk Wizard and Personal Property Wizard all allow you to customize information relative to your individual needs and you are free to use them any time.

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