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Keeping Up With The Cost Of Construction: The Importance Of Establishing The Value Of Your Home

2019-07-29
By: Advocate Brokerage

When you think about the value of your home, chances are what comes to mind first is how much you could receive if you put a for sale sign in your yard tomorrow.  However, when it comes to insurance, the value of your home should be looked at a bit differently.

 

For the purposes of insuring your home, you need to consider how much it would cost to rebuild the home in the event of a total loss.  Most of the time, the value of your home for insurance purposes is higher than what you could get if you sold it in today’s market.

 

Let’s consider a few examples of the real world of insurance.

 

Real-World Examples:

 

  • In 2013 a house fire occurred in the AC equipment room, spread quickly to the attic and caused such severe damage that the home was declared a total loss.

 

The MARKET VALUE of the home as estimated by Zillow was $1,888,594 however after the fire, the cost to REBUILD the
home was $3,270,888.

 

Luckily the homeowner had received two appraisals from her insurance carrier that accurately estimated the replacement and coverage had been adjusted annually to keep pace with the increasing cost of construction.  Although the homeowner chose not to rebuild, they would have been able to do so easily within their policy limits.

 

  • In 2011 a house fire caused by cigar ashes being deposited in a garage garbage can smoldered overnight and went undetected until a neighbor called to report the blaze.  The fire resulted in a total loss.

 

The MARKET VALUE of the home as estimated by Trulia and homes.com ranged between $402,000 – $499,950, however after all was said and done, the cost to REBUILD the home was approximately $709,684.

 

In this case, the homeowner had received an appraisal from her insurance carrier that accurately estimated the replacement cost back in 2007 and coverage had been adjusted annually to keep pace with the increasing cost of construction.

 

  • In 2011 a house burned to the ground after lights on a Christmas tree were left on all day.  Even though several of the strands were brand new, the 7 – 8 strands of lights linked together overheated and set the home ablaze.  The fire resulted in a total loss.

 

The MARKET VALUE of the home as estimated by Trulia and Zillow ranged between $907,700 – $1,640,000, however after all was said and done, the cost to REBUILD the home was approximately $2,036,000.

 

Again, the homeowner had received an appraisal from her insurance carrier that accurately estimated the replacement cost back in 2007 and coverage had been adjusted annually to keep pace with the increasing cost of construction which had outpaced market value.

 

In each of these examples, the homeowner was insured with Chubb at full replacement value and as a result, when a tragedy occurred, they were able to rebuild within the limits of their policy.  Fire, water damage or windstorm are difficult enough to face without the fear of inadequate insurance coverage.

 

How Are Replacement Costs Calculated?

There are many factors that go into the calculation of adequate replacement coverage.  If your home suffers a total loss, in order to rebuild you need to consider:

  • The current costs of building materials
  • The cost of inflation in your market
  • The cost of skilled labor
  • The current demand for high-quality contractors
  • Additional factors that may be needed to bring an older home up to the current building code
  • Any additional costs involved to get the project completed as soon as possible
  • The impact of any custom work, smart technology and specialists needed to restore the home will have on costs

 

Establishing The Value of Your Home – A few words from Chubb

Making certain that your home is insured for the full cost of reconstruction is part of Chubb’s commitment to their clients.  To support this commitment, they establish an annual Construction Cost Adjustment Factor (CCAF) to maintain adequate coverage.  To do so they will:

 

  • Analyze construction costs around the country.
  • Review claims data to make sure our replacement costs are in sync with the types of losses we are currently paying out.
  • Analyze trends and talk to builders to be sure our information on construction costs are as up to date as possible.

 

Click here for more information from Chubb.

 

Advice From Advocate
You don’t want a house fire that results in a total loss of your home to be the reason you discover you are underinsured.  Having adequate coverage makes all the difference!

  • Take the time to understand your homeowner’s policy and what type of coverage you are receiving. Purchasing insurance is about more than saving money.  The time you invest in finding the right coverage could save you money in the long run.
  • Selecting the right carrier is key.  Advocate Brokerage vets the companies we work with and will only write coverage for carriers whose work, financial ratings, customer service and claims handling we know we can stand trust.
  • When it comes time to select the type of homeowner’s insurance, we strongly recommend choosing full replacement coverage.
  • Alert us anytime you are doing a renovation or improving your home in any way.  Even what you would consider a small renovation could make your homeowner’s policy inadequate.

 

If you have any concerns regarding your homeowner’s insurance or are worried that perhaps your home may currently be underinsured, don’t hesitate to get in touch with us at 914-723-7100.  We would be happy to offer a no-obligation review of your homeowner’s insurance.

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