Understanding “replacement cost” versus “market value” of your home
My home is only worth $170,000. Why does my insurance company want me to insure it for $220,000?
One of the biggest questions consumers have regarding homeowner’s insurance revolves around the amount of insurance to place on their dwelling (home). When purchasing a house, the mortgage company requires the homeowner to obtain insurance prior to closing. Most consumers assume the amount of dwelling coverage will be equal to the amount they paid for their house. This is incorrect in most cases.
Many homeowners equate the “worth” of a home to its market value, especially if the home was a recent purchase. While market value is a valid calculation of a home’s worth for buying and selling, it has little to do with the cost of rebuilding. The estimate you are providing is the amount to reconstruct the home at today’s costs.
Why is reconstruction cost more expensive than new construction?
Rebuilding a home includes many factors and expenses not considered in new construction.
Economies of scale – It costs more for a contractor to build one home at a time because materials are not purchased in bulk. A single household item that matches the one that’s been destroyed will nearly always cost more than if it had been part of a larger purchase.
Top-down versus bottom-up – Repair work for a partially destroyed home is done from the top of the home down. This is more time consuming and labor-intensive.
Demolition and debris removal – This step is necessary before reconstruction can begin and adds to the total cost.
Use of labor – When a builder constructs many homes at once, they can efficiently schedule labor for carpenters, plumbers, electricians and other workers. For a single rebuild, labor is not as efficient and contributes to higher costs.
Access to worksite – Worksite access is easier for brand new construction. For reconstruction, obstacles such as neighboring homes, trees, lawns, fences and other landscaping prevent easy site access. This makes it difficult to transport materials and can drive up labor costs.
Building code changes – Changes to building codes may require costly updating, even for undamaged parts of a home. This could include updating wiring or other utilities and is costly, especially for older homes.
Natural disasters – After a natural disaster, the costs of building materials and labor rise because of increased demand. Over the past 20 years, there has been a significant increase in the frequency and severity of weather events, resulting in a high number of losses that require repairs.
Protecting undamaged parts of the home and contents – Keeping a partially destroyed home from further damage until permanent repairs can be made adds to the overall cost. This could involve covering a damaged roof or holes in walls.
Specialized labor is more costly – Reconstruction is often completed by contractors who specialize in rebuilding as opposed to new construction contractors. Their specialized labor tends to be more expensive.
Replicating old construction methods and materials – A standard homeowner policy provides for replacement with like kind and quality, which means replicating a home as it stands today. In older homes, interior walls are often made of plaster instead of drywall and exterior brick walls are made of solid brick instead of modern brick veneer. Homes constructed prior to 1940 were built with full dimensional lumber, which is larger and more costly than typical modern lumber. Because of features and materials such as these, older homes, especially those built prior to 1940, cost more to replace. In addition, the rising cost of commodities contributes to higher reconstruction costs. For example, petroleum based materials such as shingles have increased in cost dramatically.
Your security is our responsibility!