December 04, 2007
Homeowners insurance replacement cost discussion.
I was happy to read JBL of All Finance Matters announce his one millionth hit. While I was visiting All Finance Matters I decided to review some older insurance related articles he’s published. Being inside the insurance industry, I appreciate people from outside the industry sharing their opinions. Especially if they can articulate their viewpoint beyond “insurance sucks” or GEICO is cheaper.
In a discussion about renewing his homeowners insurance JBL discussed lowering his liability limits (I’m guessing he meant lower his dwelling coverage limits) to lower his premium. A few commenters chimed in to point out how they, using numbers from the county auditor, had come up with their own numbers for insurance values. Yikes, time to get back on my soapbox.
Replacement cost is a different number than market value and different from new-build cost and different from the building value minus land value.
Maybe I could break it down:
- Market value - Price someone would pay for a property.
- New build cost - Cost to construct a property on empty ground from scratch.
- Rehabilitation cost - Cost to take dilapidated property and upgrade it to like new condition.
- Restoration cost - Cost to restore older property to it’s original condition.
Market value is a subjective thing, reflecting the market conditions and the scarcity or oversupply of properties to be bought and sold in a given area at a given time.
When the county auditor estimates the market value of a property, their cost basis comes from sales data in a general area. The auditor knows they’re not spot on, in fact they’re only trying to get within 10% of the actual value (they figure they’ll hear from anyone who’s valued too high) and are set about once every three years. Since local tax rates are set based on the auditors findings, most people don’t rush to correct undervaluing or clamor to have their value reset more often.
Any builder can tell you the cost are different with each type of work. From cheapest to most expensive:
- New Build
- Rehab
- Restoration
For insurance work keep in mind:
- Wages paid to contractors skilled enough for restoration work are higher than new build construction.
- Material costs are higher due to loss of volume discounts.
- Special order may be required.
- All work must include cost of demolition & clean up.
- For older homes, insurance work must include doing work up to current code and abatment of hazerdous material. See a related article on replacement cost and older houses.
Looking at my own house, the math is pretty easy:
- Replacement cost = $240,000
- Square footage (living area) = 2,400 Square feet
For the math challenged that’s around $100 per sqare foot. My house has:
- Hardwood & ceramic floors throughout.
- Custom fireplace.
- Finished basement.
- Upgraded HVAC.
- Upgraded roof .
- Semi custom windows.
- Semi custom kitchen & baths.
- Upgraded interior doors and trim.
Living in central Ohio, that’s in the ballpark of construction cost to rebuild my house AS-IS. For a more ‘economy level’ rebuild figure 60-80 per square foot. Custom or ‘executive level’ rebuild would cost $120 - $200 per square foot.
Since all replacement cost models used by the insurance industry factors in local labor & building costs, it’s important to work with (and trust) your local insurance professionals.
One of the unfortunate realities of the world is the disapearing insurance agent. New agents spend most of thier time marketing, established agents are busy doing policy maintenance. In a perfect world, people would spend time reviewing coverage with their agent, have replacement cost explained to them and understand what (and why) they’re being charged. In the real world, people are too busy to spend time discussing such things.
Today’s established agents have to maintain around 2000 policies or 1000 households to make ends meet, so don’t have time sit down across a table to disagree with the occational financial genius who disagrees with a dwelling coverage.
To research replacement cost on your own try: www.accucoverage.com The site charges $7.95 (I am not affiliated and get no $$$).
Or work with your local insurance agent.
