What is the difference between rebuild and replacement cost coverage? – It is important to understand that the rebuild cost (replacement value) is the amount that the insurance company estimates it will cost to completely rebuild the property from ‘scratch’ with materials similar to the current labor rate and materials cost in the area. geographic location in which the property is located. This amount also includes ‘soft costs’ often overlooked or forgotten, such as architectural fees, permit fees, and the cost of demolishing and / or removing the damaged structure prior to reconstruction. From a strictly insurance-based perspective, the cost of rebuilding a home has absolutely no relation to the purchase price of the property, the amount of the mortgage loan, the appraised value, or the market value. In other words, the rebuild cost is a completely independent value with no correlation to any other property-related value. For example, you may have purchased a property that was appraised at a market value of $ 230,000, but due to the seller’s personal situation, you were able to negotiate the terms and buy it for $ 180,000. After providing a 20% down payment of $ 36,000, your home loan balance is just $ 154,000. Although there are several different values ​​associated with this property, none of them have anything to do with what it may actually cost to completely rebuild it after a loss.

How are reconstruction costs determined? – Another common area of ​​misinformation for homeowners is how the insurance company actually determines the cost of rebuilding a property. Contrary to common belief, this is not simply a “blind guess” as to the cost of replacing the property. This formula is a bit complex and can vary somewhat from company to company depending on the data points used, but the process (which is simplified below) is generally the same. Most companies in the United States pay an enormous amount of money each year to have full access to the Marshall & Swift / Boeck (MSB) construction database. This is an experienced and highly respected outside company that maintains accurate construction costs (materials and labor) for every ZIP code in every county in the United States. This database is updated every 90 days and is usually very accurate. When requesting a new quote for property insurance, your agent may ask you many questions about the physical characteristics of the property, such as square footage, number of floors, type of construction, roofing material, walling material exteriors, the floor coverings that are used, etc. The purpose of these questions is to understand exactly how your property is built so that this information can be entered into the carrier’s rebuilding cost software. Once this data has been obtained and entered into the system, the software works with the MSB database to compare the labor and material costs for the area and determine a fairly accurate amount of what is expected. cost to rebuild the property with current labor and materials. rates. The reason that two different companies may have two completely different rebuild costs, even when using the same data, has to do with how the company calculates its own internal cost estimate, not with the company’s database. MSB. For example, company ‘A’ may develop a rebuild cost of $ 100,000, but within their internal calculations, they can add an additional 20% for labor costs, 5% for ‘soft costs’ and 22% for materials while the Company ‘B’ uses only the hard costs provided by Marshall & Swift / Boeck. The purpose of this is to err on the side of caution and attempt to include an additional margin to compensate for any unforeseen fluctuations in actual costs after a loss. The rebuilding cost formula for each company is proprietary and agents have no exact idea how each company calculates the final cost or what margins are included. All agents have access to the final estimated replacement cost.

Can two properties built exactly the same have different rebuilding costs? Absolutely! Labor and material costs can vary greatly from one geographic area to another. For example, here in Texas, a home in El Paso may cost $ 150,000 to rebuild or replace; however, that same home, with exactly the same size and physical features, can cost $ 210,000 to rebuild or replace in Houston. The reason for this, as already mentioned, is due to local building codes, labor rates, material costs, and other similar issues.

Why are rebuilding costs for new properties greater than the builder’s sales price? – A common point of disagreement between the owner of an insured property and their insurance company is that the cost of rebuilding a property is much more than the actual purchase price of a new home that was recently built. From the client’s perspective, you may have only paid $ 200,000 for the property, which includes the builder’s construction cost, as well as the capital, land, and everything else involved, but the insurance company determines that the cost of replacement is actually $ 225,000. The client often cannot understand why the rebuilding cost for the insurance company is so much higher than for the builder and often argues that the property is overinsured. This is a logical point of view; however, this is simply not the case. When a land builder builds a new home, its construction cost is much less than that of a custom builder. The reason for this is simple. When a land builder builds a new home, they are generally building many more at the same time and in the same subdivision or geographic area. This means that the builder often purchases millions, if not tens of millions of dollars, in bulk supplies and materials. This allows the builder to obtain large volume discounts on prices, greatly reducing their overall construction costs. Additionally, the builder can use the same labor crews for framing, concrete work, and all other phases of construction. Because the builder is providing a constant, repeatable flow of work to his subcontractors and these subcontractors are working for extended periods in the same areas, the labor rate is also greatly reduced. This is not the case with regard to custom constructors. Rebuilding a property is always more expensive than new construction for the first time. If your two-year home that you bought from the original builder for $ 200,000 is destroyed in a fire, the contractor or builder you hire to rebuild the home will not have the same deep discounts on their labor and material costs. Plus, you’ll have the added expense of obtaining new plans, architectural and permitting fees, debris removal, etc. which the original constructor did not have or which was also greatly reduced. This means that rebuilding your $ 200,000 home can cost $ 250,000.

Why does it often cost more to rebuild older properties? It’s also important to understand that rebuilding older properties can cost even more. In addition to all the other aspects already outlined, older properties may have unique architectural features that are difficult to replicate with current codes and materials and some of this work may require a craftsman who specializes in things like tin roofs, ornate trim and similar works. ; all of which add to the cost of construction.

Are rebuilding costs automatically updated when my insurance policy is renewed? Yes and no, it depends on the company that issues the policy. Most standard companies automatically reprocess the rebuild cost when a policy is renewed using the information previously provided. This is why homeowners can see both their premiums and rebuilding costs increasing annually. However, if improvements or alterations have been made to the property, such as room additions, elevation changes, interior remodels, or other similar changes, the rebuild or replacement cost listed on the policy will be inaccurate as it does not include these new ones. modifications unless the insurance company is notified and this new information is included. That is why you should always contact your agent whenever you make changes to your home or property that may affect the final cost of rebuilding.

In short, there is much more to properly insuring your property for its actual replacement value than simply taking a number out of thin air. There is a well-established and methodical process for determining actual costs that can be incurred, and there is little or no relationship between the cost of rebuilding a property and the amount of the loan, appraisal, lien, or market value. These numbers are completely independent of each other and it is your responsibility, the property owner and the insured customer, to ensure that your policy contains sufficient coverage to fully indemnify you (financially compensate you) or replace the property in the event of a loss. .