Many a homeowner has been jolted to discover the market value of his personal castle has dropped – the sales price it would bring today might even be less than what’s owed on the mortgage.
Even as the cost of purchasing a home has plummeted in many areas, the cost of repairing or rebuilding a home after it is damaged continues to rise. So it’s possible that a home that could be sold for $150,000 might cost as much as $250,000 to rebuild with like materials at current building code standards.
As the gap between sales price and rebuilding cost grows, it is important for homeowners to understand the difference between insuring for replacement cost versus actual cash value. Here are definitions of these two terms you should discuss with your insurer:
Replacement cost: The cost to replace damaged property with similar materials and quality without taking into account depreciation. (For example, if your home has hardwood floors that are 10 years old, the replacement cost policy will rebuild with new hardwood floors.)
Actual cash value: The amount it would take to repair or replace damage to your home after depreciation. (Value would be subtracted for age and wear on those floors.)
“Insurance is there to help you recover, and get you back where you were before the loss,” said Russ Dubisky, executive director of the S.C. Insurance News Service. “Having replacement cost coverage is the best way to do that.”
According to the S.C. Department of Insurance, insurers may set some coverage requirements for replacement cost protection. A standard plan usually requires policy limits of at least 80 percent of replacement cost; preferred plans require policy limits of 100 percent of replacement cost.
Building costs increase due to a number of factors. When an insured loss is involved, building contractors are less likely to negotiate on price, according to Scott Spencer, a Best’s Review columnist and senior vice president of Chubb & Son insurance. Rebuilding a single home does not offer the economy of scale that building a housing development does.
Other factors that have contributed to an increase in construction costs are rising materials prices, fluctuating energy costs, an increase in pay rates for skilled labor and increased demand for imported building materials, Spencer said.
You should review your homeowners insurance policy at least once every three to five years to make sure it is keeping up with construction costs. If you have made significant improvements, such as a kitchen remodeling or room addition, the policy limits should be increased to include them in the replacement cost. Remember that your home insurance policy is a legal contract, stating your rights and responsibilities as well as those of the insurance company. Read the policy and make sure you understand what it says. Keep it in a safe place and know the name of your insurer.
