How does home replacement cost impact dwelling coverage?
Alice Yao | Updated August 13th, 2020
Dwelling coverage is the coverage that protects your home and all of the structures directly attached to it, and it is the primary coverage that determines most of your homeowners insurance premium.
The dwelling coverage amount is also the baseline that is used to calculate the coverage limits for other coverages within the policy, such as other structures and personal property.
The main factor that determines your dwelling coverage is your home replacement cost. Home replacement cost is the total estimated cost including labor and material to rebuild your home back to its original condition prior to a claim.
In this article, we will cover home replacement cost in detail with the following topics:
- How is home replacement cost different than home sales price?
- How do insurance companies determine home replacement cost?
- What factors are used to estimate home replacement cost?
- What if I think the replacement cost estimate is too low?
- Does the replacement cost update over time?
How is home replacement cost different than home sales price?
One of the most common questions asked when we review homeowners insurance policy with our clients is:
“Why is the replacement cost so much lower than the home sales price?”
Here in the Greater Seattle area, we have one of the most sought-after real estate markets in the nation. Because of this competitive market, the sales price of our homes can often be significantly higher than the cost to build them.
Home sales price is the market price of your property including both value of the land and value of any improvements on the land, such as your home, landscaping, or other features.
Home replacement cost on your insurance policy is the estimated cost including labor and material to rebuild your home back to its original condition prior to the insurance claim.
How do insurance companies determine home replacement cost?
Typically, the process starts with your insurance agent doing the research on your home using these three main sources:
- County website
- Home listing services such as MLS
- Home appraisal (if one is current)
Through the local county website database and home listings, your agent is able to identify information such as the year built of your home, total square footage, type of flooring, roofing material, etc. These are some of the main components used to estimate your home replacement cost.
If this is a new purchase, your agent may also reach out to the loan officer to obtain a copy of the residential appraisal report for the most updated information about your home.
After the initial research, your agent will reach out to you and confirm the accuracy of the information from these sources. This is a good time to make your agent aware of any upgrades or recent changes that were made to your home.
In the final step of the process, your agent enters in the data of your home to an internal calculating system, and the system will provide its estimated replacement cost of your home.
What factors are used to estimate home replacement cost?
Here is the list of the major rating factors that are used:Building info
- Year built of the home
- Total square footage
- Style of home (single or two story, split level or tri level etc.)
- Presence of basement vs no basement
- Exterior wall materials (wood siding, vinyl siding, stucco etc.)
- Age of roof
- Style and material of roof
- Size of garage
- Number of exterior doors and windows
- Number of bathrooms and kitchen
- Style of bathrooms and kitchen
- Type of interior flooring
- Style and materials of Ceiling and wall
- Number of fireplaces and type of fireplace
- Type of heating and cooling systems in the home
- Any special amenities (such as an indoor pool or spa)
Each category has additional options and grade selections to better specify quality and build grade for individual components of the factors listed above.
For example with roofing materials, there are options to select shingle, metal, or tile. With flooring, there are options for different types of carpet, hardwood, slate, or ceramic tile etc.
Make sure to notify your insurance agent of any upgraded interior or exterior features. A good example is when you replace your laminate kitchen countertop to marble or quartz. Another example is if you converted your downstairs half bath to a three-quarter bath.
Outside of upgrades, if you do any additions such as enclosing an attached carport to convert it into a garage or finishing your basement into a media room, you will find that these would impact your home replacement cost as well so again, be sure to provide these updates to your insurance agent as soon as construction is complete.
These features should be specified and included towards calculating your total insurance coverage.
The more details your insurance agent is able to capture and input into the system, the more accurate your home replacement cost is going to be.
What if I think the replacement cost estimate is too low?
We would first recommend going over the details of your home with your insurance agent once again to make sure all the information is accurate.
There are also a couple of options available to increase the protection of your home by adjusting your coverage:
- First option is simply to ask your agent to increase your dwelling coverage. For most companies, you can choose to insure your dwelling coverage up to 150% of your calculated home replacement cost.
- Second option is to increase your extended limits coverage.
Extended limits is an endorsement on your homeowners policy that extends your dwelling coverage by 20%, 25% or 40% depending on your policy options in the event that the cost to rebuild your home exceeds your stated dwelling coverage at the time of a claim.
How this endorsement is included on your policy depends on your insurance company. Some companies include this endorsement automatically at a fixed percentage and you can opt-in to a higher percentage for additional premium. Other companies do not offer options to buy up.
Does the replacement cost update over time?
Your replacement cost will fluctuate from time to time. The two major cost factors to any building construction are:
- Cost of materials
- Labor costs
Most major insurance companies design their homeowners policies to automatically include an inflation adjustment at every renewal. Not only do we need to account for inflation, we need to account for a potential surge in demand when there is widespread damage to homes in specific areas due to a natural disaster such a major windstorm or major fires caused by misuse of fireworks.
Many situations are unique and every insurance company has its own guidelines. We always recommend reaching out to your insurance agent for a comprehensive review of your coverages to ensure you are properly and adequately covered.
By Alice Yao |