What it Really Costs to Insure a Home for Rebuild

Does your current home insurance policy have guaranteed replacement coverage? If not, then you’re likely underinsured. Specifically, guaranteed replacement coverage is meant to pay for a complete rebuild of your home in the event of a major catastrophe, such as a fire or hurricane damage. This type of coverage will not only pay to rebuild your home from the ground up but to its original specifications and details, while also providing for changes in local building codes.

Unfortunately, most companies that insure homes don’t offer this type of coverage. One of the main reasons for this is because calculating the cost of guaranteed replacement coverage can be a challenge, and many people confuse market value with the cost to rebuild. With so many factors affecting the cost to rebuild a home, it can be difficult for insurance companies and agents to provide a realistic quote. But more importantly, there is no upper limit on what the insurer will pay with guaranteed replacement cost.
If you’re looking to add guaranteed replacement coverage to your policy, it can be helpful first to understand what goes into determining your home’s rebuilding costs.

Understanding Construction Cost Adjustment Factors

Home insurance companies that offer guaranteed replacement coverage typically take construction cost adjusting factors (CCAFs) into consideration annually. They then provide this information to policyholders so they can better understand why their coverage costs may be increasing or decreasing. These factors are established based on input from local general contractors and builders, economists who monitor the construction industry, current construction costs and materials, and skilled labor costs.

Common Factors Affecting the Cost of a Rebuild

There are seemingly endless factors that must be taken into consideration when determining the unique replacement cost for any given home. One of the most important factors that must be looked at regularly is that of annual increases in construction costs across the board and for the particular zip code the home is located in. Labor costs are always on-the-rise in the home-building industry, and residential material costs can vary significantly from year to year as well. For example, increased demand for building stone may lead to higher prices one year, whereas concrete or metal prices may drop. It’s easy to see how this can impact the cost to rebuild a home. Costs are also a function of the home’s location. A home located in an affluent community will cost more to build than one located elsewhere.

Changes in building codes can also have a significant impact on home replacement costs, especially for older homes. If an older home needs to be replaced, there’s a good chance that there are new coding and permitting requirements that will need to be met—this can increase the cost of the replacement project. Also, remember that home insurance pays for many different costs. Some of these include deconstruction, waste hauling and disposal, and architectural and permitting, labor, material, and general contractor profit. It also includes loss of use during the construction process, which depending upon the home and its location, can take upwards of a year or more.

Also, does your home have unique features such as special flooring, built-in cabinetry, appliances, and lighting? The type and uniqueness of the material used can have a major impact on cost. One recent Chubb analysis indicates that a Sub-Zero top-of-the-line 48” built-in refrigerator that cost $5,000 in 2000 now costs more than $17,000. The same is true with dishwashers and other built-in appliances.
It is also essential to consider how a greater overall awareness of construction’s environmental impacts can affect the cost to rebuild a home as well. Over the years, designers and builders have become more environmentally conscious; materials and construction practices that were once considered standard have been replaced with more eco-friendly alternatives. These alternatives come at a cost premium, which can increase replacement costs for a home.

The Bottom Line for Homeowners

These are just a few of the dozens (or more!) factors that an experienced home insurance agency must take into account when calculating the replacement cost of any given home. And of course, since construction and material costs are constantly changing, it’s important for insurance companies to revisit these expenses regularly. That way, policyholders can have access to the most up-to-date information and coverage.

If you don’t currently have guaranteed replacement coverage, make sure to purchase it through an insurance agency that specializes in this essential form of protection. You can then enjoy the peace of mind in knowing that your home’s replacement costs have been accurately calculated and that you’ll be covered in the event the “unthinkable” happens on your property.