Homeowner’s Insurance – Replacement Cost Coverage
Also called reconstruction or rebuilding cost, replacement cost coverage is the limit of insurance provided to rebuild your home in the event of a covered loss. Most policies show an amount for the dwelling (building), and related coverage limits for detached structures, such as a shed or detached garage, and personal property (contents and belongings).
Replacement Cost Value and Market Value
Replacement Cost is an insurance term. It reflects the current cost to rebuild your home, from the ground up, with materials and features of like kind and quality. Market value is the amount buyers are willing to pay for your home. It includes the value of land, and other factors like proximity to schools or other desired locations, as well as supply and demand. For example, the market value of your home may be $625,000, while the cost to rebuild it may only be $375,000.
Ideally, your home would be insured for its full replacement cost with a policy that provides guaranteed replacement cost coverage. This means your home is covered for the cost to replace it, without depreciation, even if it exceeds the limit on your policy. Extended replacement cost coverage is an option that extends coverage to a specified cap, usually between 25% and 50%, beyond your dwelling limit.
Determining Replacement Cost Value
To calculate a home’s replacement cost, insurance companies use many tools. These include details provided on applications, industry-specific software and calculators, and physical and virtual inspections. Factors include:
- Square footage
- Age of your home
- Custom-built or period features
- Types of fixtures, cabinets, and flooring
- Renovations and enhancements
- Furnishings and valuables
- Exterior features like siding, windows, and roof type and material
- Local construction-related costs including demolition, debris removal, labor, and materials
Inflation Guard Coverage
Also referred to as automatic value-up, inflation guard coverage is an endorsement that automatically increases your dwelling limit to protect against rising construction costs in your area. It differs from occasional modifications to base rates. Inflation guard is usually built into standard homeowners’ policies and is applied each renewal. It typically ranges from 2% to 4%.
Factors Impacting Inflation Guard
To evaluate inflation guard adjustments, insurance companies routinely review construction indices, economic indicators, claim data, and other industry trends.
The past 2 years have been anything but typical. Demand for new construction and renovations has increased. At the same time, the COVID-19 pandemic, soaring inflation, and other economic factors, have adversely affected the availability and cost of building materials and skilled labor.
Claim settlements for home reconstruction have become more costly. Consequently, insurance companies are applying higher-than-typical inflation adjustments. You’ll likely see your dwelling limit increase at a higher rate than previous years. This ensures you have adequate coverage. As inflation and related economic factors improve, we’ll see a return to more modest increases.
If you have any questions or concerns about the replacement cost value of your home, or your insurance coverage, please reach out. Our team members are ready to assist.