Replacement Value and Your Insurance Policy

Happy winter to everyone! I can’t believe 2017 is almost over.

We have had a few questions recently about homeowner’s coverage and replacement cost of the property, so I thought that we could take a moment to review. There are three values that come to mind when talking about your home: market value (what can you sell it for), assessed value (what you pay taxes on), and replacement value (how much would it cost to put back). There are times where all three of these values can vary greatly and others where the values are close. When we are looking at your insurance, we are most likely looking at your replacement value and covering your home based on that number. As an insurance provider, we typically recommend using the replacement value to determine the value of your policy.

We have a wide variety of tools that are provided by third-party vendors as well as insurance carriers to help us determine these values. Additionally, we always look at square footage, construction type, construction quality and a number of other factors when determining the replacement value of your home. As a very simple rule of thumb, for approximating replacement value you can use $160 per square foot for a frame home and $185 per square foot for a masonry home. From there, you need to add value for each unique feature on your property.

The other thing we hear frequently is that new construction after a disaster is valued less than the figures above. Keep in mind this is a little bit different exercise. We are taking the space where your home stood and cleaning up debris from a fire, wind or other inclement weather and then reconstructing. It is not uncommon to have $50-$100K tied up in the debris removal and site preparation before reconstruction has started.

The last point is to make sure you let your agent know about significant changes you make to your home. These changes usually fall into two categories. The first category is making updates to existing parts of the home, such as adding a new roof, new furnace or updating large, existing furnishings. These things do not necessarily change the replacement value because we have already figured the cost of the new roof or mechanical equipment into the replacement value. The second category does change the replacement value. A few examples of these changes are updating the kitchen or bathroom using different materials (think old Formica countertops to granite), putting on a room addition, finishing a basement, adding a swimming pool, etc. These things increase the replacement cost and should be accounted for in your insurance policy by increasing the value.

It’s worth reviewing your replacement value every now and then to make sure your agent is aware of any changes to your home. Your agent can then address and update these changes in your policy if needed. As always, if you ever have questions about your policy feel free to give us a call.

Thanks again for allowing us to protect your families and have a wonderful holiday.

Jon