My home is only worth $200,000 in today’s market, why do you want me to insure it for $240,000? This is type of question that I get monthly when quoting homeowners’ insurance. I wanted to take a high-level view of reconstruction cost and give a few of the reasons why we insure to 100% reconstruction cost and not simply what the real estate value is or what the home might be worth to the insured.
The first thing to take into consideration is that while the real estate market can fluctuate, construction materials have been steadily increasing year over year. Each year it costs more and more to build new construction due to these increasing costs. So, if your home was built in 2010 for $200,000, it might take $240,000 to build that same home from the ground up in today’s climate.
Those of us in this area know all too well about major catastrophes like Katrina. As soon as the rebuild begins the goods that increase the most in cost are construction materials. Your insurance must take this into consideration because even if your home could be rebuilt for $220,000 under normal loss conditions, a rebuild after a catastrophe could be $240,000 due to increased labor and material costs.
Lastly, as it relates to newer construction, builders usually get discounts when they are building multiple houses at once. So, if your home was built in a development the builder probably got deep discounts for buying in bulk and thus passed some of that savings on to you. Those same discounts may not be available should your home be a total loss and a rebuild was necessary.
Obviously, there is more that goes into formulating reconstruction cost including individual features of homes, but I wanted to paint a picture for you that hopefully lets you see a little of “method behind the madness”. The last thing we as agents want is to be in a situation where you need a check from your insurance carrier for $240,000 but the one you receive is only $200,000.